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 $ 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.

Answer 1

Answer- 1:

Schedule showing the impact on the company’s overall net operating income if the North Store were closed:

Superior Markets Inc.
Gross Margin lost if the store is closed		316800
Less: Costs that can be avoided
- Sales Salaries	70000
- Direct Advertising	51000
- Store Rent	85000
- Delivery Salaries	4000
- Store Management salaries (Note:1)	9000
- Salary of new manager	11000
- General office compensation	6000
- Insurance on inventories (Note: 2)	5000
- Utilities	31000
- Employment taxes (Note: 3)	15000	287000
Profit to be lost if North Store is closed		29800

   Note-1: Total store management salaries = $21,000,

               Less: General Manager’s salary = $12,000

                Net Salaries to be avoided = $ 9,000

   Note-2: Total Insurance on fixtures and inventories = $ 7500

                  Less: 1/3 insurance on fixtures (7500 *1/3) = $ 2500

                 Net insurance expenses that can be avoided = $ 5000

   Note- 3: Total Employees’ salaries that can be avoided

Sales Salaries (70,000) + Delivery Salaries (4,000) + Store management salaries (9,000) + Salary of new manager (11,000) + General office compensation (6,000) = 100,000

      Employment taxes that can be avoided = 100,000 * 15% = 15,000

Answer-2:

The company should not close its North Store as it will result into loss of $ 29,800 net operating profit.

Answer-3:

Schedule showing net advantage of closing the North Store:   

Superior Markets Inc
Gross Margin lost if the store is closed		-316800
Gross margin gained from the East Store (Note-4)		81000
Net Gross margin to be lost		-235800
Less: Costs that can be avoided		287000
Net Advantage of Closing the store		51200

      

Note-4: Total sales that would transfer to South Store = 720,000 * ¼ = 180,000

               Gross Margin of South Store (540,000/1,200,000) = 45%

               Additional gross margin to be gained by South Store = 180,000 * 45% = 81,000.

Answer-4:

The company should close its North Store as it will help to save $ 51,200 per quarter.

PLEASE, Rate the solution if it's helpful to you ..