EXCEL Format Required
Bob’s Beans, a coffee shop and breakfast catering chain, operates three cafes in South Florida. Segment reporting for the last quarter as follows:
Bob’s Beans, Inc.
Income Statement
For the Quarter
Total Location 1 Location 2 Location 3
Sales 3,000,000 720,000 1,200,000 1,080,000
COGS 1,657,200 403,200 660,000 594,000
Gross margin 1,342,800 316,800 540,000 486,000
SG&A Expenses:
Selling expenses 817,000 231,400 315,000 270,600
Admin expenses 383,000 106,000 150,900 126,100
Total expenses 1,200,000 337,400 465,900 396,700
Net operating income (loss) 142,800 (20,600) 74,100 89,300
Location 1 has consistently shown losses over the past two years. For this reason, management is giving consideration to closing the store. The company has asked you to make a recommendation as to whether the store should be closed or kept open. The following additional information is available for your use:
a. The breakdown of the selling and administrative expenses is as follows (Advertising costs, general office salaries and general office other are incurred at the total company level and allocated based on sales dollars):
Total Location 1 Location 2 Location 3
Selling expenses:
Sales salaries 239,000 70,000 89,000 80,000
Direct advertising 187,000 51,000 72,000 64,000
General advertising 45,000 10,800 18,000 16,200
Store rent 300,000 85,000 120,000 95,000
Depreciation of store fixtures 16,000 4,600 6,000 5,400
Delivery salaries 21,000 7,000 7,000 7,000
Depreciation of delivery equipment 9,000 3,000 3,000 3,000
Total selling expenses 817,000 231,400 315,000 270,600
Total Location 1 Location 2 Location 3
Administrative expenses:
Store management salaries 70,000 21,000 30,000 19,000
General office salaries 50,000 12,000 20,000 18,000
Insurance on fixtures and inventory 25,000 7,500 9,000 8,500
Utilities 106,000 31,000 40,000 35,000
Employment taxes 57,000 16,500 21,900 18,600
General office—other 75,000 18,000 30,000 27,000
Total administrative expenses 383,000 106,000 150,900 126,100
b. The lease on the building housing the Location 1 can be broken with no penalty.
c. The fixtures being used in the Location 1 would be transferred to the other two stores if the Location 1 were closed.
d. The general manager of the Location 1 would be retained and transferred to another position in the company if the Location 1 were closed. She would be filling a position that would otherwise be filled by hiring a new employee at a salary of $11,000 per quarter. The general manager of the Location 1 would be retained at her normal salary of $12,000 per quarter. All other employees in the store would be discharged.
e. The company has one delivery crew that serves all three stores. One delivery person could be discharged if the Location 1 were closed. This person’s salary is $4,000 per quarter. The delivery equipment would be distributed to the other stores. The equipment does not wear out through use, but does eventually become obsolete.
f. The company’s employment taxes are 15% of salaries.
g. One-third of the insurance in the Location 1 is on the store’s fixtures.
h. The “General office salaries” and “General office—other” relate to the overall management of the company. If the Location 1 were closed, one person in the general office could be discharged because of the decrease in overall workload. This person’s compensation is $6,000 per quarter.
Required:
1. Prepare a schedule showing the change in revenues and expenses and the impact on the company’s overall net operating income that would result if the Location 1 were closed.
2. Assuming that the store space can’t be subleased, what recommendation would you make to the management of Bob’s Beans?
3. Disregard requirement 2. Assume that if the Location 1 were closed, at least one-fourth of its sales would transfer to the Location 3, due to strong customer loyalty to Bob’s Beans. Location 3 has enough capacity to handle the increased sales. You may assume that the increased sales in Location 3 would yield the same gross margin as a percentage of sales as present sales in that store. What effect would these factors have on your recommendation concerning the Location 1?
Show all computations to support your answer.
