Question

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Superior Markets, Inc., operates three stores in a large metropolitan area. A segmented absorption costing income...

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 $ 3,000,000 $ 720,000 $ 1,200,000 $ 1,080,000
Cost of goods sold 1,657,200 403,200 660,000 594,000
Gross margin 1,342,800 316,800 540,000 486,000
Selling and administrative expenses:
Selling expenses: 817,000 231,400 315,000 270,600
Administrative expenses 383,000 106,000 150,900 126,100
Total expenses 1,200,000 337,400 465,900 396,700
Net operating income (loss) $ 142,800 $ (20,600 ) $ 74,100 $ 89,300

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:

a. The breakdown of the selling and administrative expenses is as follows:

Total North
Store
South
Store
East
Store
Selling expenses:
Sales salaries $ 239,000 $ 70,000 $ 89,000 $ 80,000
Direct advertising 187,000 51,000 72,000 64,000
General advertising* 45,000 10,800 18,000 16,200
Store rent 300,000 85,000 120,000 95,000
Depreciation of store fixtures 16,000 4,600 6,000 5,400
Delivery salaries 21,000 7,000 7,000 7,000
Depreciation of delivery equipment 9,000 3,000 3,000 3,000
Total selling expenses $ 817,000 $ 231,400 $ 315,000 $ 270,600

*Allocated on the basis of sales dollars.

Total North
Store
South
Store
East
Store
Administrative expenses:
Store management salaries $ 70,000 $ 21,000 $ 30,000 $ 19,000
General office salaries* 50,000 12,000 20,000 18,000
Insurance on fixtures and inventory 25,000 7,500 9,000 8,500
Utilities 106,000 31,000 40,000 35,000
Employment taxes 57,000 16,500 21,900 18,600
General office —other* 75,000 18,000 30,000 27,000
Total administrative expenses $ 383,000 $ 106,000 $ 150,900 $ 126,100

*Allocated on the basis of sales dollars.

b. The lease on the building housing the North Store can be broken with no penalty.

c. The fixtures being used in the North Store would be transferred to the other two stores if the North Store were closed.

d. 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 $11,000 per quarter. The general manager of the North Store would be retained at her normal salary of $12,000 per quarter. All other employees in the store would be discharged.

e. 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 $4,000 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.

f. The company’s employment taxes are 15% of salaries.

g. One-third of the insurance in the North Store is on the store’s fixtures.

h. 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 $6,000 per quarter.


Required:

1. Prepare a schedule showing the change in revenues and expenses and the impact on the company’s overall net operating income that would result if the North Store were closed. (Any losses/ reductions should be indicated by a minus sign.)


2. Based on your computations in (1) above, what recommendation would you make to the management of Superior Markets, Inc.?

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


3. Assume that if the North Store were closed, at least one-fourth of its sales would transfer to the East Store, due to strong customer loyalty to Superior Markets. The East Store has enough capacity to handle the increased sales. You may assume that the increased sales in the East Store would yield the same gross margin as a percentage of sales as present sales in that store.


a. Calculate the net advantage of closing the North Store. (Any losses should be indicated by a minus sign.)


b. What recommendation would you make to the management of Superior Markets, Inc.?

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

Solutions

Expert Solution

1 Gross margin lost if north store is closed -316800
Savings in cost:
Store rent 85000
Sales salaries 70000
Direct adveritising 51000
Delivery salaries 4000
Store management salaries
(21000-12000) 9000
Salary of new manager 11000
General office compensation 6000
Insurance (7500*2/3) 5000
Utilities 31000
Employment taxes (Note:1) 15000 287000
Decrease in net profit if North store is closed -29800
Note:1 -Computation of employment taxes:-
Salaries which can be avoided,
Sales salaries 70000
Delivery salaries 4000
Store management salaries 9000
Salary of new manager 11000
General office compensation 6000
Total 100000
Employment tax rate * 15%
Employment tax avoidable 15000
2 The North Store should not be closed (Since there is a decrease in overall net profit by $29800)
3-a. Gross margin lost if north store is closed -316800
Gross margin earned from East store (Note:2) 81000
Net gross margin lost -235800
Savings in cost 287000
Net advantage of closing north store 51200
3-b. The North Store should be closed (Since there is an increase in overall net profit by $51200)
Note:2 -Gross margin earned from East store
Gross margin % of east store=Gross margin/Sales=486000/1080000=0.45=45%
Sales transferred from North to East store=1/4 th of sales=720000*1/4=$ 180000
Gross margin earned from sales transferred=180000*45%=$ 81000

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