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	$	4,700,000		$	940,000		$	1,880,000		$	1,880,000
Cost of goods sold		2,585,000			580,000			971,000			1,034,000
Gross margin		2,115,000			360,000			909,000			846,000
Selling and administrative expenses:
Selling expenses		851,000			248,400			323,500			279,100
Administrative expenses		468,000			123,000			176,400			168,600
Total expenses		1,319,000			371,400			499,900			447,700
Net operating income (loss)	$	796,000		$	(11,400	)	$	409,100		$	398,300

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	$	252,800	$	60,600	$	80,200	$	112,000
Direct advertising		182,000		68,000		89,000		25,000
General advertising*		70,500		14,100		28,200		28,200
Store rent		281,000		86,000		105,000		90,000
Depreciation of store fixtures		24,500		6,300		7,700		10,500
Delivery salaries		26,100		8,700		8,700		8,700
Depreciation of delivery equipment		14,100		4,700		4,700		4,700
Total selling expenses	$	851,000	$	248,400	$	323,500	$	279,100

*Allocated on the basis of sales dollars.

	Total		North Store		South Store		East Store
Administrative expenses:
Store managers' salaries	$	95,500	$	29,500	$	38,500	$	27,500
General office salaries*		70,500		14,100		28,200		28,200
Insurance on fixtures and inventory		42,000		12,600		17,500		11,900
Utilities		75,765		26,365		21,860		27,540
Employment taxes		66,735		16,935		23,340		26,460
General office—other*		117,500		23,500		47,000		47,000
Total administrative expenses	$	468,000	$	123,000	$	176,400	$	168,600

*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 $13,100 per quarter. The general manager of the North Store would continue to earn her normal salary of $14,100 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 $5,700 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 $7,050 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?

How much employee salaries will the company avoid if it closes the North Store?

Required 1
	Employee salaries 101,850

How much employment taxes will the company avoid if it closes the North Store?

Required 2
	Employment taxes $15,278

What is the financial advantage (disadvantage) of closing the North Store? (Enter any "disadvantages" as a negative value.)

Required 3
	Financial advantage (disadvantage) $???

Requirement 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? (Enter any "disadvantages" as a negative value.)

	Financial advantage (disadvantage) ???

Answer 1

Solution 1
Computation of Avoidable Employee Salaries
Sales salaries	60600
Delivery Salaries	5700
Store manager Salaries (29500-14100)	15400
General office salaries	7050
Salary of New manager	13100
Total	101850
Solution 2
Computation of Avoidable Employment Taxes
Avoidable employee Salaries	101850
*Employment tax rate	15%
Avoidable Employment Taxes	15277.5
Solution 3
Computation of financial advantage (disadvantage) of closing the North Store
Gross Margin lost if North store closed		-360000
Cost that can be avoided:
Sales salaries	60600
Delivery Salaries	5700
Store manager Salaries (29500-14100)	15400
General office salaries	7050
Salary of New manager	13100
Employment Tax	15277.5
Direct Advertising	68000
Store Rent	86000
Insurance on Inventory (12600*2/3)	8400
Utilities	26365
Total Cost Avoided		305892.5
Financial advantage (Disadvantage) of Closing North Store		-54107.5
Solution 4:
No, we would not recommend closing the North Store as there is net financial disadvantage of ($54,107.50)
Solution 5:
Contribution margin ratio of East store
Gross Margin of East store	846000
Sales of East Store	1880000
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	-360000
Gross Margin gained from east store ($940,000*1/4*45%)	105750
Net loss of Gross Margin	-254250
Less: Total Cost that can be avoided (Computed in part 3)	305892.5
Financial advantage (disadvantage) of closing the North Store	51642.5