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	$	4,000,000		$	840,000		$	1,600,000		$	1,560,000
Cost of goods sold		2,200,000			495,000			847,000			858,000
Gross margin		1,800,000			345,000			753,000			702,000
Selling and administrative expenses:
Selling expenses		837,000			241,400			320,000			275,600
Administrative expenses		433,000			116,000			165,900			151,100
Total expenses		1,270,000			357,400			485,900			426,700
Net operating income (loss)	$	530,000		$	(12,400	)	$	267,100		$	275,300

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	$	235,000	$	55,200	$	83,000	$	96,800
Direct advertising		175,000		61,000		82,000		32,000
General advertising*		60,000		12,600		24,000		23,400
Store rent		310,000		95,000		112,000		103,000
Depreciation of store fixtures		21,000		5,600		7,000		8,400
Delivery salaries		24,000		8,000		8,000		8,000
Depreciation of delivery equipment		12,000		4,000		4,000		4,000
Total selling expenses	$	837,000	$	241,400	$	320,000	$	275,600

*Allocated on the basis of sales dollars.

	Total		North Store		South Store		East Store
Administrative expenses:
Store managers' salaries	$	85,000	$	26,000	$	35,000	$	24,000
General office salaries*		60,000		12,600		24,000		23,400
Insurance on fixtures and inventory		35,000		10,500		14,000		10,500
Utilities		92,400		30,630		30,400		31,370
Employment taxes		60,600		15,270		22,500		22,830
General office—other*		100,000		21,000		40,000		39,000
Total administrative expenses	$	433,000	$	116,000	$	165,900	$	151,100

*Allocated on the basis of sales dollars.

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

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

4. 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 $11,600 per quarter. The general manager of the North Store would continue to earn her normal salary of $12,600 per quarter. All other managers and employees in the North store would be discharged.

5. 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 $5,000 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.

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

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

8. 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 $6,300 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.The Company Will Avoid Employee's Salaries = Sales Salaries + 1 Delivery Person salary + Manager's Salaries + General Office Salaries

= 55200 + 5000 +(26000 -12600) +6300 = $ 79900

2.The Company will avoid employment Taxes = 15% of Employee's salaries Avoided = 79900*15% = $ 11985

3.Financial Advantage of closing North Store =(a)Advantage- They can save Salaries that are not under filing and other variable exp. which are not fixed in nature.

(b) Disadvantage - They will have to incur all fixed expenses and covers under filing nature and loss of not making sales as well.

4.By assuming the floor couldn't be subleased of North Store ,In that situation such Store should not be closed as the Loss incurred $12600 is less than Store Rent $95000.

5(i) Gain of closing North Store = 840000*1/4 + 79900 + 11985 )] = $265515

Loss of closing North Store = 840000*3/4 + 95000

=$ 725000

Loss is Greater than Gain case of Closing North Store .Hence, The store should not be closed.

5(ii) If East Store has the Capacity to handle the Increased sales then North Store should be Closed as Saving of Expenses was there.

5(iii) If East Store would Yield same gross margin as percentage of sales as present sales in East Store. The Gross margin of East Store 45% is Greater than North Store gross Margin 41.07%(approx.). In That Case, North Store Should be Closed.

Gross margin of North Store = 345000*100/840000 = 41.07%

Gross margin of East Store = 702000*100/156000 = 45%