Question

In: Accounting

Problem 11-26 Close or Retain a Store [LO11-2] Superior Markets, Inc., operates three stores in a...

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 $ 3,200,000 $ 740,000 $ 1,280,000 $ 1,180,000
Cost of goods sold 1,760,000 423,000 688,000 649,000
Gross margin 1,440,000 317,000 592,000 531,000
Selling and administrative expenses:
Selling expenses 821,000 233,400 316,000 271,600
Administrative expenses 393,000 108,000 153,900 131,100
Total expenses 1,214,000 341,400 469,900 402,700
Net operating income (loss) $ 226,000 $ (24,400 ) $ 122,100 $ 128,300

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 $ 233,800 $ 67,100 $ 84,200 $ 82,500
Direct advertising 181,000 53,000 74,000 54,000
General advertising* 48,000 11,100 19,200 17,700
Store rent 310,000 87,000 122,000 101,000
Depreciation of store fixtures 17,000 4,800 6,200 6,000
Delivery salaries 21,600 7,200 7,200 7,200
Depreciation of delivery
equipment
9,600 3,200 3,200 3,200
Total selling expenses $ 821,000 $ 233,400 $ 316,000 $ 271,600

*Allocated on the basis of sales dollars.

Total North
Store
South
Store
East
Store
Administrative expenses:
Store managers' salaries $ 73,000 $ 22,000 $ 31,000 $ 20,000
General office salaries* 48,000 11,100 19,200 17,700
Insurance on fixtures and inventory 27,000 8,100 10,000 8,900
Utilities 108,540 32,190 40,460 35,890
Employment taxes 56,460 16,110 21,240 19,110
General office—other* 80,000 18,500 32,000 29,500
Total administrative expenses $ 393,000 $ 108,000 $ 153,900 $ 131,100

*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 $10,100 per quarter. The general manager of the North Store would continue to earn her normal salary of $11,100 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 $4,200 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 $5,550 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 67100
Delivery Salaries 4200
Store manager Salaries (22000-11100) 10900
General office salaries 5550
Salary of New manager 10100
Total 97850
Solution 2
Computation of Avoidable Employment Taxes
Avoidable employee Salaries 97850
*Employment tax rate 15%
Avoidable Employment Taxes 14678
Solution 3
Computation of financial advantage (disadvantage) of closing the North Store
Gross Margin lost if North store closed -317000
Cost that can be avoided:
Sales salaries 67100
Delivery Salaries 4200
Store manager Salaries (22000-11100) 10900
General office salaries 5550
Salary of New manager 10100
Employment Tax 14678
Direct Advertising 53000
Store Rent 87000
Insurance on Inventory (8100*2/3) 5400
Utilities 32190
Total Cost Avoided 290118
Financial advantage (Disadvantage) of Closing North Store -26883
Solution 4:
No, we would not recommend closing the North Store as there is net financial disadvantage of ($26883).
Solution 5:
Contribution margin ratio of East store
Gross Margin of East store 531000
Sales of East Store 1180000
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 -317000
Gross Margin gained from east store ($740,000*1/4*45%) 83250
Net loss of Gross Margin -233750
Less: Total Cost that can be avoided (Computed in part 3) 290117.5
Financial advantage (disadvantage) of closing the North Store 56367.5

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