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	$	4,200,000		$	840,000		$	1,680,000		$	1,680,000
Cost of goods sold		2,310,000			500,000			886,000			924,000
Gross margin		1,890,000			340,000			794,000			756,000
Selling and administrative expenses:
Selling expenses		841,000			243,400			321,000			276,600
Administrative expenses		443,000			118,000			168,900			156,100
Total expenses		1,284,000			361,400			489,900			432,700
Net operating income (loss)	$	606,000		$	(21,400	)	$	304,100		$	323,300

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	$	256,800	$	68,600	$	78,200	$	110,000
Direct advertising		177,000		63,000		84,000		30,000
General advertising*		63,000		12,600		25,200		25,200
Store rent		285,000		81,000		114,000		90,000
Depreciation of store fixtures		22,000		5,800		7,200		9,000
Delivery salaries		24,600		8,200		8,200		8,200
Depreciation of delivery equipment		12,600		4,200		4,200		4,200
Total selling expenses	$	841,000	$	243,400	$	321,000	$	276,600

*Allocated on the basis of sales dollars.

	Total		North Store		South Store		East Store
Administrative expenses:
Store managers' salaries	$	88,000	$	27,000	$	36,000	$	25,000
General office salaries*		63,000		12,600		25,200		25,200
Insurance on fixtures and inventory		37,000		11,100		15,000		10,900
Utilities		85,140		28,840		28,560		27,740
Employment taxes		64,860		17,460		22,140		25,260
General office—other*		105,000		21,000		42,000		42,000
Total administrative expenses	$	443,000	$	118,000	$	168,900	$	156,100

*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 $11,600 per quarter. The general manager of the North Store would continue to earn her normal salary of $12,600 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 $5,200 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 $6,300 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	68600
Delivery Salaries	5200
Store manager Salaries (27000-12600)	14400
General office salaries	6300
Salary of New manager	11600
Total	106100
Solution 2
Computation of Avoidable Employment Taxes
Avoidable employee Salaries	106100
*Employment tax rate	15%
Avoidable Employment Taxes	15915
Solution 3
Computation of financial advantage (disadvantage) of closing the North Store
Gross Margin lost if North store closed		-340000
Cost that can be avoided:
Sales salaries	68600
Delivery Salaries	5200
Store manager Salaries (27000-12600)	14400
General office salaries	6300
Salary of New manager	11600
Employment Tax	15915
Direct Advertising	63000
Store Rent	81000
Insurance on Inventory (11100*2/3)	7400
Utilities	28840
Total Cost Avoided		302255
Financial advantage (Disadvantage) of Closing North Store		-37745
Solution 4:
No, we would not recommend closing the North Store as there is net financial disadvantage of ($37,745)
Solution 5:
Contribution margin ratio of East store
Gross Margin of East store	756000
Sales of East Store	1680000
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	-340000
Gross Margin gained from east store ($840,000*1/4*45%)	94500
Net loss of Gross Margin	-245500
Less: Total Cost that can be avoided (Computed in part 3)	302255
Financial advantage (disadvantage) of closing the North Store	56755