Assignment
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:
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Bob's Beans, Inc.
Income Statement
For the Quarter
|
|
Total
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Location 1
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Location 2
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Location 3
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Sales
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3,000,000
|
720,000
|
1,200,000
|
1,080,000
|
|
COGS
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1,657,200
|
403,200
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660,000
|
594,000
|
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Gross margin
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1,342,800
|
316,800
|
540,000
|
486,000
|
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SG&A Expenses:
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|
|
|
|
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Selling expenses
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817,000
|
231,400
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315,000
|
270,600
|
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Admin expenses
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383,000
|
106,000
|
150,900
|
126,100
|
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Total expenses
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1,200,000
|
337,400
|
465,900
|
396,700
|
|
Net operating income (loss)
|
142,800
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-20,600
|
74,100
|
89,300
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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):
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Total
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Location 1
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Location 2
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Location 3
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Selling expenses:
|
|
|
|
|
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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
|
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Depreciation of store fixtures
|
16,000
|
4,600
|
6,000
|
5,400
|
|
Delivery salaries
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21,000
|
7,000
|
7,000
|
7,000
|
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Depreciation of delivery equipment
|
9,000
|
3,000
|
3,000
|
3,000
|
|
Total selling expenses
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817,000
|
231,400
|
315,000
|
270,600
|
|
Total
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Location 1
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Location 2
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Location 3
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Administrative expenses:
|
|
|
|
|
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Store management salaries
|
70,000
|
21,000
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30,000
|
19,000
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General office salaries
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50,000
|
12,000
|
20,000
|
18,000
|
|
Insurance on fixtures and inventory
|
25,000
|
7,500
|
9,000
|
8,500
|
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Utilities
|
106,000
|
31,000
|
40,000
|
35,000
|
|
Employment taxes
|
57,000
|
16,500
|
21,900
|
18,600
|
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General office-other
|
75,000
|
18,000
|
30,000
|
27,000
|
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Total administrative expenses
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383,000
|
106,000
|
150,900
|
126,100
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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.