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	$	3,300,000		$	760,000		$	1,320,000		$	1,220,000
Cost of goods sold		1,815,000			433,000			711,000			671,000
Gross margin		1,485,000			327,000			609,000			549,000
Selling and administrative expenses:
Selling expenses		823,000			234,400			316,500			272,100
Administrative expenses		398,000			109,000			155,400			133,600
Total expenses		1,221,000			343,400			471,900			405,700
Net operating income (loss)	$	264,000		$	(16,400	)	$	137,100		$	143,300

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	$	227,200	$	65,500	$	81,800	$	79,900
Direct advertising		182,000		54,000		75,000		53,000
General advertising*		49,500		11,400		19,800		18,300
Store rent		315,000		88,000		123,000		104,000
Depreciation of store fixtures		17,500		4,900		6,300		6,300
Delivery salaries		21,900		7,300		7,300		7,300
Depreciation of delivery equipment		9,900		3,300		3,300		3,300
Total selling expenses	$	823,000	$	234,400	$	316,500	$	272,100

*Allocated on the basis of sales dollars.

	Total		North Store		South Store		East Store
Administrative expenses:
Store managers' salaries	$	74,500	$	22,500	$	31,500	$	20,500
General office salaries*		49,500		11,400		19,800		18,300
Insurance on fixtures and inventory		28,000		8,400		10,500		9,100
Utilities		107,535		31,695		39,540		36,300
Employment taxes		55,965		16,005		21,060		18,900
General office—other*		82,500		19,000		33,000		30,500
Total administrative expenses	$	398,000	$	109,000	$	155,400	$	133,600

*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 $10,400 per quarter. The general manager of the North Store would continue to earn her normal salary of $11,400 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 $4,300 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 $5,700 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?

	The North Store should be closed. The North Store should not be closed.

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.)

Answer 1

Solution 1
Computation of Avoidable Employee Salaries
Sales salaries	65500
Delivery Salaries	4300
Store manager Salaries (22500-11400)	11100
General office salaries	5700
Salary of New manager	10400
Total	97000
Solution 2
Computation of Avoidable Employment Taxes
Avoidable employee Salaries	97000
*Employment tax rate	15%
Avoidable Employment Taxes	14550
Solution 3
Computation of financial advantage (disadvantage) of closing the North Store
Gross Margin lost if North store closed		-327000
Cost that can be avoided:
Sales salaries	65500
Delivery Salaries	4300
Store manager Salaries (22500-11400)	11100
General office salaries	5700
Salary of New manager	10400
Employment Tax	14550
Direct Advertising	54000
Store Rent	88000
Insurance on Inventory (8400*2/3)	5600
Utilities	31695
Total Cost Avoided		290845
Financial advantage (Disadvantage) of Closing North Store		-36155
Solution 4:
No, we would not recommend closing the North Store as there is net financial disadvantage of ($36,155)
Solution 5:
Contribution margin ratio of East store
Gross Margin of East store	549000
Sales of East Store	1220000
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	-327000
Gross Margin gained from east store ($760,000*1/4*45%)	85500
Net loss of Gross Margin	-241500
Less: Total Cost that can be avoided (Computed in part 3)	290845
Financial advantage (disadvantage) of closing the North Store	49345