Question

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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 $ 3,500,000 $ 780,000 $ 1,400,000 $ 1,320,000
Cost of goods sold 1,925,000 450,000 749,000 726,000
Gross margin 1,575,000 330,000 651,000 594,000
Selling and administrative expenses:
Selling expenses 827,000 236,400 317,500 273,100
Administrative expenses 408,000 111,000 158,400 138,600
Total expenses 1,235,000 347,400 475,900 411,700
Net operating income (loss) $ 340,000 $ (17,400 ) $ 175,100 $ 182,300

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 $ 228,000 $ 62,600 $ 77,000 $ 88,400
Direct advertising 170,000 56,000 77,000 37,000
General advertising* 52,500 11,700 21,000 19,800
Store rent 325,000 90,000 125,000 110,000
Depreciation of store fixtures 18,500 5,100 6,500 6,900
Delivery salaries 22,500 7,500 7,500 7,500
Depreciation of delivery
equipment
10,500 3,500 3,500 3,500
Total selling expenses $ 827,000 $ 236,400 $ 317,500 $ 273,100

*Allocated on the basis of sales dollars.

Total North
Store
South
Store
East
Store
Administrative expenses:
Store managers' salaries $ 77,500 $ 23,500 $ 32,500 $ 21,500
General office salaries* 52,500 11,700 21,000 19,800
Insurance on fixtures and inventory 30,000 9,000 11,500 9,500
Utilities 103,425 31,505 37,700 34,220
Employment taxes 57,075 15,795 20,700 20,580
General office—other* 87,500 19,500 35,000 33,000
Total administrative expenses $ 408,000 $ 111,000 $ 158,400 $ 138,600

*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 $10,700 per quarter. The general manager of the North Store would continue to earn her normal salary of $11,700 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 $4,500 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 $5,850 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

Solution 1
Computation of Avoidable Employee Salaries
Sales salaries 62600
Delivery Salaries 4500
Store manager Salaries (23500-11700) 11800
General office salaries 5850
Salary of New manager 10700
Total 95450
Solution 2
Computation of Avoidable Employment Taxes
Avoidable employee Salaries 95450
*Employment tax rate 15%
Avoidable Employment Taxes 14317.5
Solution 3
Computation of financial advantage (disadvantage) of closing the North Store
Gross Margin lost if North store closed -330000
Cost that can be avoided:
Sales salaries 62600
Delivery Salaries 4500
Store manager Salaries (23500-11700) 11800
General office salaries 5850
Salary of New manager 10700
Employment Tax 14317.5
Direct Advertising 56000
Store Rent 90000
Insurance on Inventory (9000*2/3) 6000
Utilities 31505
Total Cost Avoided 293272.5
Financial advantage (Disadvantage) of Closing North Store -36727.5
Solution 4:
No, we would not recommend closing the North Store as there is net financial disadvantage of ($36,727.50)
Solution 5:
Contribution margin ratio of East store
Gross Margin of East store 594000
Sales of East Store 1320000
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 -330000
Gross Margin gained from east store ($780,000*1/4*45%) 87750
Net loss of Gross Margin -242250
Less: Total Cost that can be avoided (Computed in part 3) 293272.5
Financial advantage (disadvantage) of closing the North Store 51022.5

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