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	$	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?

Answer 1

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