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	$	3,100,000		$	700,000		$	1,240,000		$	1,160,000
Cost of goods sold		1,705,000			380,000			687,000			638,000
Gross margin		1,395,000			320,000			553,000			522,000
Selling and administrative expenses:
Selling expenses		819,000			232,400			315,500			271,100
Administrative expenses		388,000			107,000			152,400			128,600
Total expenses		1,207,000			339,400			467,900			399,700
Net operating income (loss)	$	188,000		$	(19,400	)	$	85,100		$	122,300

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	$	240,400	$	69,000	$	86,600	$	84,800
Direct advertising		180,000		52,000		73,000		55,000
General advertising*		46,500		10,500		18,600		17,400
Store rent		305,000		86,000		121,000		98,000
Depreciation of store fixtures		16,500		4,700		6,100		5,700
Delivery salaries		21,300		7,100		7,100		7,100
Depreciation of delivery equipment		9,300		3,100		3,100		3,100
Total selling expenses	$	819,000	$	232,400	$	315,500	$	271,100

*Allocated on the basis of sales dollars.

	Total		North Store		South Store		East Store
Administrative expenses:
Store managers' salaries	$	71,500	$	21,500	$	30,500	$	19,500
General office salaries*		46,500		11,000		18,600		16,900
Insurance on fixtures and inventory		26,000		7,800		9,500		8,700
Utilities		109,545		32,910		41,380		35,255
Employment taxes		56,955		16,290		21,420		19,245
General office—other*		77,500		17,500		31,000		29,000
Total administrative expenses	$	388,000	$	107,000	$	152,400	$	128,600

*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 $10,000 per quarter. The general manager of the North Store would continue to earn her normal salary of $11,000 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 $4,100 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 $5,500 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

Answer 1:            Employee salaries the company will avoid if it closes the North Store

Working:

Salaries being paid currently        Sales Salaries                                                  $69,000.00        

                                                            Delivery salaries                                            $7,100.00          

                                                            Store managers' salaries                              $21,500.00       

                                                            General office salaries                                  $11,000.00        $108,600.00

                                                           

(Less: Salaries if North
Store Closes)                                   Sales Salaries (Note:1)                                 $0.00  

                                                            Delivery salaries (Note:2)                            $3,000.00          

                                                            Store managers' salaries (Note: 3)            $11,000.00       

                                                            General office salaries (Note:4)                 $5,500.00           $(19,500.00)

Total Savings from Salaries                                                                                   $89,100.00

Notes:                                               

1             All sales employees will be discharged if the north store closes.                                

2             One person from delivery crew is discharged whose salary is $4,100. Hence, salary being paid after store closes is $7,100-$4,100=$3,000.                                  

3             Except for the general manager of the store all other employees are being discharged. Hence, only $11,000 will paid against Store manager's salaries.                                 

4             One person in the general office could be discharged whose compensation is $5,500 per quarter. Hence, salary being paid after north store closes is $11,000-$5,500=$5,500.

Answer 2:            Employment taxes the company will avoid if it closes the North Store                                          

              Employment Taxes currently being paid ($108,600*15%)                               $16,290

Less:      Employment Taxes after North Store Closes         ($19,500*15%)                  $2,925

               Total Savings on Employment Taxes                                                                    $13,365

Answer 3:           

Assuming all else remains the same, the advantages & disadvantages of closing the North Store have been highlighted below with all calculations.

                             

Advantages

1. Total Selling Expenses will reduce to $607,900.
2. Total Administrative Expenses will reduce to $330,965.

                             

Disadvantages

1. Net Operating Income for the company will reduce to $136,135 if the North Store Closes, due to downsizing of the business. It is assumed the revenue from the other stores remains the same as no additional information is provided in the question.
2. Overall revenue is decreased.

                             

Working:                           

                                             Before North Store Closes            After North Store Closes

Sales                                                   3,100,000                                          2,400,000

Cost of goods sold                          1,705,000                                          1,325,000

Gross margin                                    1,395,000                                          1,075,000

Selling and administrative
expenses:                          

Selling expenses                              819,000                                             607,900

Administrative expenses               388,000                                             330,965

Total expenses                                 1,207,000                                          938,865

Net operating income (loss)         188,000                                             136,135

                             

                                             Before North Store Closes            After North Store Closes

Selling expenses:                            

Sales salaries                                    240,400                                             171,400

Direct advertising                            180,000                                             128,000

General advertising*                      46,500                                                46,500

Store rent                                          305,000                                             219,000

Depreciation of store fixtures      16,500                                                16,500

Delivery salaries                              21,300                                                17,200

Depreciation of
delivery equipment                         9,300                                                  9,300

Total selling expenses                    819,000                                             607,900

                             

                                             Before North Store Closes            After North Store Closes

Administrative expenses:                            

Store managers' salaries               71,500                                                61,000

General office salaries*                46,500                                                41,000

Insurance on fixtures
and inventory                                  26,000                                                20,800

Utilities                                              109,545                                             76,635

Employment taxes                          56,955                                                54,030

General office—other*                77,500                                                77,500

Total administrative expenses     388,000                                             330,965