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 $ 3,600,000 $ 800,000 $ 1,440,000 $ 1,360,000 Cost of goods sold 1,980,000 470,000 762,000 748,000 Gross margin 1,620,000 330,000 678,000 612,000 Selling and administrative expenses: Selling expenses 829,000 237,400 318,000 273,600 Administrative expenses 413,000 112,000 159,900 141,100 Total expenses 1,242,000 349,400 477,900 414,700 Net operating income (loss) $ 378,000 $ (19,400 ) $ 200,100 $ 197,300 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: 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 $ 221,400 $ 61,000 $ 74,600 $ 85,800 Direct advertising 171,000 57,000 78,000 36,000 General advertising* 54,000 12,000 21,600 20,400 Store rent 330,000 91,000 126,000 113,000 Depreciation of store fixtures 19,000 5,200 6,600 7,200 Delivery salaries 22,800 7,600 7,600 7,600 Depreciation of delivery equipment 10,800 3,600 3,600 3,600 Total selling expenses $ 829,000 $ 237,400 $ 318,000 $ 273,600 *Allocated on the basis of sales dollars. Total North Store South Store East Store Administrative expenses: Store managers' salaries $ 79,000 $ 24,000 $ 33,000 $ 22,000 General office salaries* 54,000 12,000 21,600 20,400 Insurance on fixtures and inventory 31,000 9,300 12,000 9,700 Utilities 102,420 31,010 36,780 34,630 Employment taxes 56,580 15,690 20,520 20,370 General office—other* 90,000 20,000 36,000 34,000 Total administrative expenses $ 413,000 $ 112,000 $ 159,900 $ 141,100 *Allocated on the basis of sales dollars. The lease on the building housing the North Store can be broken with no penalty. The fixtures being used in the North Store would be transferred to the other two stores if the North Store were closed. 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 $11,000 per quarter. The general manager of the North Store would continue to earn her normal salary of $12,000 per quarter. All other managers and employees in the North store would be discharged. 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 $4,600 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. The company pays employment taxes equal to 15% of their employees' salaries. One-third of the insurance in the North Store is on the store’s fixtures. 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 $6,000 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	61000
Delivery Salaries	4600
Store manager Salaries (24000-12000)	12000
General office salaries	6000
Salary of New manager	11000
Total	94600
Solution 2
Computation of Avoidable Employment Taxes
Avoidable employee Salaries	94600
*Employment tax rate	15%
Avoidable Employment Taxes	14190
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	61000
Delivery Salaries	4600
Store manager Salaries (24000-12000)	12000
General office salaries	6000
Salary of New manager	11000
Employment Tax	14190
Direct Advertising	57000
Store Rent	91000
Insurance on Inventory (9300*2/3)	6200
Utilities	31010
Total Cost Avoided		294000
Financial advantage (Disadvantage) of Closing North Store		-36000
Solution 4:
No, we would not recommend closing the North Store as there is net financial disadvantage of ($36,000)
Solution 5:
Contribution margin ratio of East store
Gross Margin of East store	612000
Sales of East Store	1360000
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 ($800,000*1/4*45%)	90000
Net loss of Gross Margin	-240000
Less: Total Cost that can be avoided (Computed in part 3)	294000
Financial advantage (disadvantage) of closing the North Store	54000