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	$	4,700,000		$	940,000		$	1,880,000		$	1,880,000
Cost of goods sold		2,585,000			580,000			971,000			1,034,000
Gross margin		2,115,000			360,000			909,000			846,000
Selling and administrative expenses:
Selling expenses		851,000			248,400			323,500			279,100
Administrative expenses		468,000			123,000			176,400			168,600
Total expenses		1,319,000			371,400			499,900			447,700
Net operating income (loss)	$	796,000		$	(11,400	)	$	409,100		$	398,300

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	$	252,800	$	60,600	$	80,200	$	112,000
Direct advertising		182,000		68,000		89,000		25,000
General advertising*		70,500		14,100		28,200		28,200
Store rent		281,000		86,000		105,000		90,000
Depreciation of store fixtures		24,500		6,300		7,700		10,500
Delivery salaries		26,100		8,700		8,700		8,700
Depreciation of delivery equipment		14,100		4,700		4,700		4,700
Total selling expenses	$	851,000	$	248,400	$	323,500	$	279,100

*Allocated on the basis of sales dollars.

	Total		North Store		South Store		East Store
Administrative expenses:
Store managers' salaries	$	95,500	$	29,500	$	38,500	$	27,500
General office salaries*		70,500		14,200		28,200		28,100
Insurance on fixtures and inventory		42,000		12,600		17,500		11,900
Utilities		75,765		26,250		21,860		27,655
Employment taxes		66,735		16,950		23,340		26,445
General office—other*		117,500		23,500		47,000		47,000
Total administrative expenses	$	468,000	$	123,000	$	176,400	$	168,600

*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 $13,200 per quarter. The general manager of the North Store would continue to earn her normal salary of $14,200 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 $5,700 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 $7,100 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 will company avoid if closes north store.
Sales salaries                      60600
Delivery Salaries                   5700
Store manager Salaries        15300 (29500-14200)
General office salaries          7100
Salary of New manager        13200
Total                                   101900

2). Employment taxes the company will avoid are:
= 101900*15% = 15285

3). Calculation of Advantage or disadvantage.
Employee salaries          101900
Employment taxes          15285
Rent                               86000
Insurance                        8400    (12600/3*2)
Direct advertising             68000
Utilities                           26250
Total Exp avoided            305835
Reduction in Gross Margin is $360000
Net Disadvantage = 360000-305835 = $54165
(Here no explanation is given on Direct advertising and utiliities and are looking to be directly attributable so deemed as avoidable)

4). Even if the space of North store can be subleased it is not advisable to close the store because there is disadvantage even when the lease can be broken without any penalty.

5). If 1/4 of sales of norht store is tfd to east store.
Gross margin of 1/4 sales = 360000/4 = $90000
Current disadvantage for closing the store = $ 54165
Net advantage = 90000- 54165 = $35835.
Hence now from above calculations there is a advantage in closing the north store ,