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	$	3,300,000		$	760,000		$	1,320,000		$	1,220,000
Cost of goods sold		1,815,000			433,000			711,000			671,000
Gross margin		1,485,000			327,000			609,000			549,000
Selling and administrative expenses:
Selling expenses:		823,000			234,400			316,500			272,100
Administrative expenses		398,000			109,000			155,400			133,600
Total expenses		1,221,000			343,400			471,900			405,700
Net operating income (loss)	$	264,000		$	(16,400	)	$	137,100		$	143,300

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	$	227,200	$	65,500	$	81,800	$	79,900
Direct advertising		182,000		54,000		75,000		53,000
General advertising*		49,500		11,400		19,800		18,300
Store rent		315,000		88,000		123,000		104,000
Depreciation of store fixtures		17,500		4,900		6,300		6,300
Delivery salaries		21,900		7,300		7,300		7,300
Depreciation of delivery equipment		9,900		3,300		3,300		3,300
Total selling expenses	$	823,000	$	234,400	$	316,500	$	272,100

*Allocated on the basis of sales dollars.

	Total		North Store		South Store		East Store
Administrative expenses:
Store management salaries	$	74,500	$	22,500	$	31,500	$	20,500
General office salaries*		49,500		11,400		19,800		18,300
Insurance on fixtures and inventory		28,000		8,400		10,500		9,100
Utilities		107,535		31,695		39,540		36,300
Employment taxes		55,965		16,005		21,060		18,900
General office —other*		82,500		19,000		33,000		30,500
Total administrative expenses	$	398,000	$	109,000	$	155,400	$	133,600

*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 $10,400 per quarter. The general manager of the North Store would be retained at her normal salary of $11,400 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 $4,300 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 $5,700 per quarter.

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.)

      

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

Answer 1

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.):

Particulars	Amount in $
Gross margin Lost if North Store is Closed (A)	327,000
Less: Avoidable Cost
Sales salaries	65,500
Direct Advertising	54,000
Store Rent	88,000
Delivery Salary	4,300
Store Management Salary ($ 22,500- $ 11,400)	11,100
New Manager Salary	10,400
Insurance on inventory ($8,400 X2/3)	5,600
General office salaries	5,700
Utilities	31,695
Employment taxes [(65,500+4,300+111,00+10,400+5,700) X15%]	14,550
Total Avoidable Cost (B)	290,845
Decrease in Company Profit if North Store is Closed (A-B)	36,155

2.Based on your computations in (1) above, what recommendation would you make to the management of Superior Markets, Inc.?

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.)

Gross Profit margin of East Store = 549,000/1,220,000 = 45%

Sales Transferfrom North Store to East Store = 760,000 X 1/4 = 190,000

Hence, Gross Margin earned on sales = 190,000 X 45% = 85,500

Hence, Profit of the Compnaty increase :

Particulars	Amount in $
Profit due to closing of North Store and Transfer 1/4 Sales to East Store	85,500
Profit over avoidable Cost	36,155
Overall Increase in Profit of the Compay	49,345

b. What recommendation would you make to the management of Superior Markets, Inc.?

Based on 3 a Answer orth Store Should be Closed