Sparta Fashions owns four clothing stores, where it sells a wide range of women's fashions, from casual attire to formal wear. In addition, it rents formal wear and gowns for special occasions. At the end of last year, the financial statements showed that although Sparta Fashions as a whole was comfortably profitable, the Downtown store had shown a substantial loss. The following is the income statement for the Downtown Store store for year just ended: SPARTA FASHIONSDowntown StoreStore-Level Income Statement Sales $ 1,072,500 Cost of goods sold 924,000 Gross margin $ 148,500 Costs: Salaries, wages, and commissionsa $ 84,150 Leaseb 26,565 State taxesc 4,125 Insurance on inventory 30,360 Depreciationd 12,375 Administration and general officee 33,000 Interest for inventory carrying costsf 7,425 Total costs 198,000 Loss $ (49,500) Additional Information: a These costs would be saved if the store were closed. b The lease is cancellable and would be saved if the store were closed. c Assessed annually on the basis of average inventory on hand each month. d 12 percent of cost of departmental equipment. The equipment has no salvage value, and Sparta Fashions would incur no costs in scrapping it. eAllocated on the basis of store sales as a fraction of total company sales. Management estimates that 15 percent of these costs allocated to the Fifth Avenue store could be saved if the store were closed. f Based on average inventory quantity multiplied by the company’s borrowing rate for three-month loans. The Downtown store is the only one in the chain that shows an annual loss and members of the board believe it should be closed. Both the corporate operations and finance staff agree that closing the Downtown store will not negatively impact sales at the other stores. Required: a. Calculate the total cost saved by closing the Downtown store.
Sparta Fashions owns four clothing stores, where it sells a wide range of women's fashions, from casual attire to formal wear. In addition, it rents formal wear and gowns for special occasions. At the end of last year, the financial statements showed that although Sparta Fashions as a whole was comfortably profitable, the Downtown store had shown a substantial loss. The following is the income statement for the Downtown Store store for year just ended:
| SPARTA FASHIONS Downtown Store Store-Level Income Statement |
||
| Sales | $ 1,072,500 | |
|---|---|---|
| Cost of goods sold | 924,000 | |
| Gross margin | $ 148,500 | |
| Costs: | ||
| Salaries, wages, and commissionsa | $ 84,150 | |
| Leaseb | 26,565 | |
| State taxesc | 4,125 | |
| Insurance on inventory | 30,360 | |
| Depreciationd | 12,375 | |
| Administration and general officee | 33,000 | |
| Interest for inventory carrying costsf | 7,425 | |
| Total costs | 198,000 | |
| Loss | $ (49,500) |
Additional Information:
a These costs would be saved if the store were closed.
b The lease is cancellable and would be saved if the store were closed.
c Assessed annually on the basis of average inventory on hand each month.
d 12 percent of cost of departmental equipment. The equipment has no salvage value, and Sparta Fashions would incur no costs in scrapping it.
eAllocated on the basis of store sales as a fraction of total company sales. Management estimates that 15 percent of these costs allocated to the Fifth Avenue store could be saved if the store were closed.
f Based on average inventory quantity multiplied by the company’s borrowing rate for three-month loans.
The Downtown store is the only one in the chain that shows an annual loss and members of the board believe it should be closed. Both the corporate operations and finance staff agree that closing the Downtown store will not negatively impact sales at the other stores.
Required:
a. Calculate the total cost saved by closing the Downtown store.
Step by step
Solved in 2 steps
