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	$	3,500,000		$	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?

Answer 1

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