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Superior Markets, Inc., operates three stores in a large metropolitan area. A segmented absorption costing income...

Superior Markets, Inc., operates three stores in a large metropolitan area. A segmented absorption costing income statement for the company for the last quarter is given below:

Superior Markets, Inc.
Income Statement
For the Quarter Ended September 30
Total North
Store
South
Store
East
Store
Sales $ 4,300,000 $ 860,000 $ 1,720,000 $ 1,720,000
Cost of goods sold 2,365,000 510,000 909,000 946,000
Gross margin 1,935,000 350,000 811,000 774,000
Selling and administrative expenses:
Selling expenses 843,000 244,400 321,500 277,100
Administrative expenses 448,000 119,000 170,400 158,600
Total expenses 1,291,000 363,400 491,900 435,700
Net operating income (loss) $ 644,000 $ (13,400 ) $ 319,100 $ 338,300

The North Store 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:

  1. The breakdown of the selling and administrative expenses that are shown above is as follows:

Total North
Store
South
Store
East
Store
Selling expenses:
Sales salaries $ 250,200 $ 67,000 $ 75,800 $ 107,400
Direct advertising 178,000 64,000 85,000 29,000
General advertising* 64,500 12,900 25,800 25,800
Store rent 290,000 82,000 115,000 93,000
Depreciation of store fixtures 22,500 5,900 7,300 9,300
Delivery salaries 24,900 8,300 8,300 8,300
Depreciation of delivery
equipment
12,900 4,300 4,300 4,300
Total selling expenses $ 843,000 $ 244,400 $ 321,500 $ 277,100

*Allocated on the basis of sales dollars.

Total North
Store
South
Store
East
Store
Administrative expenses:
Store managers' salaries $ 89,500 $ 27,500 $ 36,500 $ 25,500
General office salaries* 64,500 13,000 25,800 25,700
Insurance on fixtures and inventory 38,000 11,400 15,500 11,100
Utilities 84,135 28,230 27,640 28,265
Employment taxes 64,365 17,370 21,960 25,035
General office—other* 107,500 21,500 43,000 43,000
Total administrative expenses $ 448,000 $ 119,000 $ 170,400 $ 158,600

*Allocated on the basis of sales dollars.

  1. The lease on the building housing the North Store can be broken with no penalty.

  2. The fixtures being used in the North Store would be transferred to the other two stores if the North Store were closed.

  3. The general manager of the North Store would be retained and transferred to another position in the company if the North Store were closed. She would be filling a position that would otherwise be filled by hiring a new employee at a salary of $12,000 per quarter. The general manager of the North Store would continue to earn her normal salary of $13,000 per quarter. All other managers and employees in the North store would be discharged.

  4. The company has one delivery crew that serves all three stores. One delivery person could be discharged if the North Store were closed. This person’s salary is $5,300 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.

  5. The company pays employment taxes equal to 15% of their employees' salaries.

  6. One-third of the insurance in the North Store is on the store’s fixtures.

  7. The “General office salaries” and “General office—other” relate to the overall management of Superior Markets, Inc. If the North Store were closed, one person in the general office could be discharged because of the decrease in overall workload. This person’s compensation is $6,500 per quarter.

Required:

1. How much employee salaries will the company avoid if it closes the North Store?

2. How much employment taxes will the company avoid if it closes the North Store?

3. What is the financial advantage (disadvantage) of closing the North Store?

4. Assuming that the North Store's floor space can’t be subleased, would you recommend closing the North Store?

5. Assume that the North Store's floor space can’t be subleased. However, let's introduce three more assumptions. First, assume that if the North Store were closed, one-fourth of its sales would transfer to the East Store, due to strong customer loyalty to Superior Markets. Second, assume that the East Store has enough capacity to handle the increased sales that would arise from closing the North Store. Third, assume that the increased sales in the East Store would yield the same gross margin as a percentage of sales as present sales in the East store. Given these new assumptions, what is the financial advantage (disadvantage) of closing the North Store?

Solutions

Expert Solution

1). Employee salaries will company avoid if closes north store.
Sales salaries   $67,000
Delivery Salaries   $5,300
Store manager Salaries $14500 (27500-13000)
General office salaries $6,500
Salary of New manager   $12,000
Total    $105,300
2). Employment taxes the company will avoid are:
105300*15% $15,795
3). Calculation of Advantage or disadvantage.
Employee salaries $105,300
Employment taxes $15,795
Rent   $82,000
Insurance $ 7600 (11400/3*2)
Direct advertising $64,000
Utilities $28,230
Total Exp avoided $302,925
Reduction in Gross Margin is $350,000
Net Disadvantage 350000-302925 = $47075
(Here no explanation is given on Direct advertising and utilities and are looking to be directly attributable so deemed as avoidable)
4). Even if the space of North store can be subleased it is not advisable to close the store because there is disadvantage even when the lease can be broken without any penalty.
5). If 1/4 of sales of north store is transferred to east store.
Gross Margin of east store 774000 / 1720000 = 0.45             or 45%
1/4 sales of North Store 860000/4 = $215000
Gross Margin of 1/4 transferred sales $215000 * 45% = $96750
Current disadvantage for closing the store                      $47,075
Net advantage 96750- 47075= $49675
Hence the north store in this situation should be closed.

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