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. 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 reductions or outflows 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. 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.)

Answer 1

Computation based on the data given:

Superior markets inc.
Income Statement
For the Quarter Ended September 30
		North	South	East
	Total	Store	Store	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:
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
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
Total expenses	1,200,000	337,400	465,900	396,700
Net operating income (loss)	$   142,800	$ (20,600)	$     74,100	$     89,300
Additional Data:
Manager's salary per quarter	$     12,000
New employee's salary per quarter	$     11,000
Employment tax as a percentage of salaries	15%
Delivery person's salary per quarter	$      4,000
Insurance related to downtown fixtures	1/3
Discharged employee's salary per quarter	$      6,000
Assumed sales transferred to East store	25%

REQUIREMENT 1:
Gross margin lost if store is closed		-316800
costs which can be avoided:
sales salaries		70000
direct advertising		51000
store rent		85000
delivery salaries		4000
store managemant salaries		9000
salary of new manager		11000
general office compensation		6000
insurance on inventories		5000
utilities		31000
employment taxes*		15000
		287000
decrease in company net operating income if the downtown store is closed
*salaries avoided by closing the store:
sales salaries		70000
delivery salaries		4000
store managemant salaries		9000
salary of new manager		11000
general office compensation		6000
total avoided		100000
employment tax rate		15%
employment tax avoided		15000
Requirement 2:
Assuming that the store space cant be subleased , recommendation to the management of Superior markets ins is as under:
The North Store is supposed to not be closed. Because the company’s overall net income will reduced by $29,800 per quarter. If the store room should not be subleased a decision to close the store would reason an even greater decline in the company’s overall net in-come.
Requirement 3:
computations:
Gross margin lost if the store is closed	-316800
Gross margin gained at the uptown store	81000
Net operating loss in gross margin	-235800
LESS: avoidable costs if North store is closed	287000
Net advantage of closing North store	51200