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	$	4,500,000		$	900,000		$	1,800,000		$	1,800,000
Cost of goods sold		2,475,000			550,000			935,000			990,000
Gross margin		2,025,000			350,000			865,000			810,000
Selling and administrative expenses:
Selling expenses		847,000			246,400			322,500			278,100
Administrative expenses		458,000			121,000			173,400			163,600
Total expenses		1,305,000			367,400			495,900			441,700
Net operating income (loss)	$	720,000		$	(17,400	)	$	369,100		$	368,300

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	$	237,000	$	63,800	$	71,000	$	102,200
Direct advertising		180,000		66,000		87,000		27,000
General advertising*		67,500		13,500		27,000		27,000
Store rent		300,000		84,000		117,000		99,000
Depreciation of store fixtures		23,500		6,100		7,500		9,900
Delivery salaries		25,500		8,500		8,500		8,500
Depreciation of delivery equipment		13,500		4,500		4,500		4,500
Total selling expenses	$	847,000	$	246,400	$	322,500	$	278,100

*Allocated on the basis of sales dollars.

	Total		North Store		South Store		East Store
Administrative expenses:
Store managers' salaries	$	92,500	$	28,500	$	37,500	$	26,500
General office salaries*		67,500		14,000		27,000		26,500
Insurance on fixtures and inventory		40,000		12,000		16,500		11,500
Utilities		82,125		26,780		25,800		29,545
Employment taxes		63,375		17,220		21,600		24,555
General office—other*		112,500		22,500		45,000		45,000
Total administrative expenses	$	458,000	$	121,000	$	173,400	$	163,600

*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 $13,000 per quarter. The general manager of the North Store would continue to earn her normal salary of $14,000 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 $5,500 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 $7,000 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. Salaries avoided by closing the store:

Sales salaries $63,800   

Delivery salaries $5,500

Store management salaries(28,500-14000) $14,500

salary of new manager $13,000

General office compensation $7,000

Total Avoided $103,800

2.Employment Taxes Avoided = $103,800 * 15% = $15,570

3.Gross Margin lost if the store is closed $350,000

costs that can be avoided:

Sales salaries $63,800

Direct advertising $66,000

Store Rent $84,000

Delivery salaries $5,500

store management salaries$14,500

Salary of new manager $13,000

General office compensation$7,000

Insurance on inventories$8,000

Utilities $26,780

Employment taxes $15,570

$304,150

Decrease in company profits if northstore is closed $45850

Based on the above, the North Store should not be closed.

4.If the store space cannot be subleased or the lease broken without penalty, a decision to close the store would cause an even greater decline in the company's overall net income. Therefore, closing of North Store is not recommandable.

5. Gross Margin lost if the North Store is closed $350,000

Gross margin gained from the East Store $101,250

Net operating in gross margin $248,750

costs that can be avoided $304,150

Net advantage of closing the North Store $55,400

Gross margin percentage of East Store is:810000/1800000 =45%

Gross margin gained at the east store:$900,000*1/4 =$225,000; $225,000*45%=$101,250