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	$	3,700,000		$	800,000		$	1,480,000		$	1,420,000
Cost of goods sold		2,035,000			460,000			794,000			781,000
Gross margin		1,665,000			340,000			686,000			639,000
Selling and administrative expenses:
Selling expenses		831,000			238,400			318,500			274,100
Administrative expenses		418,000			113,000			161,400			143,600
Total expenses		1,249,000			351,400			479,900			417,700
Net operating income (loss)	$	416,000		$	(11,400	)	$	206,100		$	221,300

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:

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	$	214,800	$	59,700	$	72,200	$	82,900
Direct advertising		172,000		58,000		79,000		35,000
General advertising*		55,500		12,000		22,200		21,300
Store rent		335,000		92,000		127,000		116,000
Depreciation of store fixtures		19,500		5,300		6,700		7,500
Delivery salaries		23,100		7,700		7,700		7,700
Depreciation of delivery equipment		11,100		3,700		3,700		3,700
Total selling expenses	$	831,000	$	238,400	$	318,500	$	274,100

*Allocated on the basis of sales dollars.

	Total		North Store		South Store		East Store
Administrative expenses:
Store managers' salaries	$	80,500	$	24,500	$	33,500	$	22,500
General office salaries*		55,500		12,000		22,200		21,300
Insurance on fixtures and inventory		32,000		9,600		12,500		9,900
Utilities		101,415		31,315		35,860		34,240
Employment taxes		56,085		15,585		20,340		20,160
General office—other*		92,500		20,000		37,000		35,500
Total administrative expenses	$	418,000	$	113,000	$	161,400	$	143,600

*Allocated on the basis of sales dollars.

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

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

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 continue to earn her normal salary of $12,000 per quarter. All other managers and employees in the North store would be discharged.

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 $4,700 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.

The company pays employment taxes equal to 15% of their employees' salaries.

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

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. 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

1. Employee salaries that the company will avoid if it closes the North store
Store manager's salaries	$12,500
Delivery person salary	$4,700
Sales salaries	$59,700
General Office salaries	$6,000
Salary of new manager	$11,000
Total employee salaries avoided	$93,900
2. Employment tax that the company will avoid if it closes the north store
Employment tax rate	15%
Employee salaries avoided	$93,900
Employment tax avoided	$14,085
3. Financial advantage/(disadvantage) of closing North store
Simplest approach to this is
Gross margin lost	($340,000)
Cost that can be avoided:
Employee salaries	$93,900
Employment tax	$14,085
Direct advertising	$58,000
Store Rent	$92,000
Insurance on inventory (9600 x 2/3)	$6,400
Utilities	$31,315
	$295,700
Financial (disadvantage) of closing the North store	($44,300)
4. Based on the data in requirement 3, the company should not close North store as it will be losing gross margin of $44300
per quarter. If the North store's floor space can't be subleased or broken the lease without penalty, the condition will be
more worse as the company has to pay a rent of $92000 per quarter, and it will increase the loss from $44300 to $136300 per
quarter
5. Financial advantage (disadvantage) if 1/4 sales of North store would transfer to East store
Gross margin lost of North Store	($340,000)
Sales transferred to East Store (800000 x 1/4)
Gross margin gained from transfer to East Store
(200000 x 45%)	$90,000
Net operating loss in gross margin	($250,000)
Cost that can be avoided (requirement 3)	$295,700
Financial advantage of closing the North store	$45,700
Note:
The East store gross margin percentage = $639000/$1420000 x 100 = 45%