Question

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	$	3,900,000		$	820,000		$	1,560,000		$	1,520,000
Cost of goods sold		2,145,000			480,000			829,000			836,000
Gross margin		1,755,000			340,000			731,000			684,000
Selling and administrative expenses:
Selling expenses		835,000			240,400			319,500			275,100
Administrative expenses		428,000			115,000			164,400			148,600
Total expenses		1,263,000			355,400			483,900			423,700
Net operating income (loss)	$	492,000		$	(15,400	)	$	247,100		$	260,300

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	$	241,600	$	56,800	$	85,400	$	99,400
Direct advertising		174,000		60,000		81,000		33,000
General advertising*		58,500		12,300		23,400		22,800
Store rent		305,000		94,000		111,000		100,000
Depreciation of store fixtures		20,500		5,500		6,900		8,100
Delivery salaries		23,700		7,900		7,900		7,900
Depreciation of delivery equipment		11,700		3,900		3,900		3,900
Total selling expenses	$	835,000	$	240,400	$	319,500	$	275,100

*Allocated on the basis of sales dollars.

	Total		North Store		South Store		East Store
Administrative expenses:
Store managers' salaries	$	83,500	$	25,500	$	34,500	$	23,500
General office salaries*		58,500		12,400		23,400		22,700
Insurance on fixtures and inventory		34,000		10,200		13,500		10,300
Utilities		93,405		31,010		31,320		31,075
Employment taxes		61,095		15,390		22,680		23,025
General office—other*		97,500		20,500		39,000		38,000
Total administrative expenses	$	428,000	$	115,000	$	164,400	$	148,600

*Allocated on the basis of sales dollars.

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

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

4. 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 $11,400 per quarter. The general manager of the North Store would continue to earn her normal salary of $12,400 per quarter. All other managers and employees in the North store would be discharged.

5. 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 $4,900 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.

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

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

8. 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 $6,200 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?

Answer 1

	Superior Markets Inc.
	Total Salaries Avoided if closed down North Store
	Sales Salaries	$                       56,800.00
	Delivery Salaries	$                          4,900.00
	Store Management Salaries	$                       13,100.00
	Salary of new manager	$                       11,400.00
	General office compensation(It is treated as part of salaries)	$                          6,200.00
	Total Salaries Avoided	$                       92,400.00
	Employments Taxes avoided by Company=($92400*15%)	$                       13,860.00
	Gross Margin lost if the North Store would be closed down	$                  -3,40,000.00
	Cost can be avoided due to closed down of North Store
	Sales Salaries	$                       56,800.00
	Direct Advertising	$                       60,000.00
	Store Rent	$                       94,000.00
	Delivery Salaries	$                          4,900.00
	Store Management Salaries($25500-$12400)	$                       13,100.00
	Salary of new manager	$                       11,400.00
	General office compensation	$                          6,200.00
	Insurance on Inventories($10200*2/3)	$                          6,800.00
	Utitlites	$                       31,010.00
	Employment Taxes	$                       13,860.00
	Total Cost to be avoided	$                    2,98,070.00
	Company's Profit is decrease due to North Store is closed down	$                      -41,930.00
	The net operating income of the company would be decreased by $41930 when North Store should be closed so it is beneficial for a Company to continue North Store.
4)	If the Store Space cannot be subleased then Net operting income of North Store would be decreased by=(Net loss+Store Rent)=($41930+$94000)	$                    1,35,930.00
5)	Gross Margin of 1/4 th sales of East Store when 1/4 sales of North store transfrred to East Store)
	1/4 Sales of North Store transferred to East Store=($820000*1/4)	$                    2,05,000.00
	Gross Margin for $205000 Sales of East Store=($205000*45%)	$                       92,250.00
	Gross Margin lost due to closed down North Store	$                  -3,40,000.00
	Net Operating loss in gross margin($340000-$92250)	$                  -2,47,750.00
	Less: Cost to be avoided if the North Store closed down	$                    2,98,070.00
	Net advantage of closing the North Store($298070-247750)	$                       50,320.00
	Gross Margin of East Store=(Gross Profit/Sales)*100=($684000/$1520000)*100	0.45