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	$	5,000,000		$	960,000		$	2,000,000		$	2,040,000
Cost of goods sold		2,750,000			600,000			1,028,000			1,122,000
Gross margin		2,250,000			360,000			972,000			918,000
Selling and administrative expenses:
Selling expenses		857,000			251,400			325,000			280,600
Administrative expenses		483,000			126,000			180,900			176,100
Total expenses		1,340,000			377,400			505,900			456,700
Net operating income (loss)	$	910,000		$	(17,400	)	$	466,100		$	461,300

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	$	246,000	$	64,400	$	73,000	$	108,600
Direct advertising		185,000		71,000		92,000		22,000
General advertising*		75,000		14,400		30,000		30,600
Store rent		283,000		81,000		108,000		94,000
Depreciation of store fixtures		26,000		6,600		8,000		11,400
Delivery salaries		27,000		9,000		9,000		9,000
Depreciation of delivery equipment		15,000		5,000		5,000		5,000
Total selling expenses	$	857,000	$	251,400	$	325,000	$	280,600

*Allocated on the basis of sales dollars.

	Total		North Store		South Store		East Store
Administrative expenses:
Store managers' salaries	$	100,000	$	31,000	$	40,000	$	29,000
General office salaries*		75,000		14,400		30,000		30,600
Insurance on fixtures and inventory		45,000		13,500		19,000		12,500
Utilities		70,800		25,280		19,100		26,420
Employment taxes		67,200		17,820		22,800		26,580
General office—other*		125,000		24,000		50,000		51,000
Total administrative expenses	$	483,000	$	126,000	$	180,900	$	176,100

*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 $13,400 per quarter. The general manager of the North Store would continue to earn her normal salary of $14,400 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 $6,000 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.

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 $7,200 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

Part 1

Salaries avoided by closing the store

Sales salaries	64400
Delivery salaries	6000
Store management salaries (31000-14400)	16600
Salary of new manager	13400
General office compensation	7200
Total salaries avoided	$107600

Part 2

Total Salaries avoided	107600
Employment tax rate	15%
Employment taxes avoided	16140

Part 3

Gross margin lost if the store is closed		(360000)
Costs that can be avoided:
Sales salaries	64400
Direct advertising	71000
Store rent	81000
Delivery salaries	6000
Store management salaries (31000-14400)	16600
Salary of new manager	13400
General office compensation	7200
Insurance on inventories (13500*2/3)	9000
Utilities	25280
Employment taxes	16140
Total costs that can be avoided		310020
Decrease in company profits if the North Store is closed		(49980)

Financial disadvantage of closing the North Store = $(49980)

Part 4

The North Store should not be closed

Increase in financial (disadvantage) of closing the North Store = Decrease in company profits if the North Store is closed + rent cannot be avoided = (49980)+(81000) = ($130980). Therefore, the North Store should not be closed.

Part 5

The North store should be closed.

Financial advantage of closing the North Store = Gross margin lost if the North Store is closed + Gross margin gained from the East Store+ costs that can be avoided if the North Store is closed = -360000+(960000*1/4*(936000/1920000))-(-310020) = $67020