Question

Problem 11-26 Close or Retain a Store [LO11-2]

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		12,900		25,800		25,800
Insurance on fixtures and inventory		38,000		11,400		15,500		11,100
Utilities		84,135		28,345		27,640		28,150
Employment taxes		64,365		17,355		21,960		25,050
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 $11,900 per quarter. The general manager of the North Store would continue to earn her normal salary of $12,900 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 $6,450 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

Solution 1
Computation of Avoidable Employee Salaries
Sales salaries	67000
Delivery Salaries	5300
Store manager Salaries (27500-12900)	14600
General office salaries	6450
Salary of New manager	11900
Total	105250
Solution 2
Computation of Avoidable Employment Taxes
Avoidable employee Salaries	105250
*Employment tax rate	15%
Avoidable Employment Taxes	15788
Solution 3
Computation of financial advantage (disadvantage) of closing the North Store
Gross Margin lost if North store closed		-350000
Cost that can be avoided:
Sales salaries	67000
Delivery Salaries	5300
Store manager Salaries (27500-12900)	14600
General office salaries	6450
Salary of New manager	11900
Employment Tax	15788
Direct Advertising	64000
Store Rent	82000
Insurance on Inventory (11400*2/3)	7600
Utilities	28345
Total Cost Avoided		302983
Financial advantage (Disadvantage) of Closing North Store		-47018
Solution 4:
No, we would not recommend closing the North Store as there is net financial disadvantage of ($47018).
Solution 5:
Contribution margin ratio of East store
Gross Margin of East store	774000
Sales of East Store	1720000
Contribution margin ratio of East Store	45.00%
Under New assumption: Computation of Financial advantage (disadvantage) of closing the North Store
Gross Margin lost if North store closed	-350000
Gross Margin gained from east store ($860,000*1/4*45%)	96750
Net loss of Gross Margin	-253250
Less: Total Cost that can be avoided (Computed in part 3)	302983
Financial advantage (disadvantage) of closing the North Store	49733