Wednesday 30 October 2019

Superior Markets, Inc., operates three stores in a large metropolitan area. A segmented

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
TotalNorth
Store
South
Store
East
Store
Sales$3,100,000$700,000$1,240,000$1,160,000
Cost of goods sold1,705,000380,000687,000638,000
Gross margin1,395,000320,000553,000522,000
Selling and administrative expenses:
Selling expenses819,000232,400315,500271,100
Administrative expenses388,000107,000152,400128,600
Total expenses1,207,000339,400467,900399,700
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:
  1. The breakdown of the selling and administrative expenses that are shown above is as follows:
TotalNorth
Store
South
Store
East
Store
Selling expenses:
Sales salaries$240,400$69,000$86,600$84,800
Direct advertising180,00052,00073,00055,000
General advertising*46,50010,50018,60017,400
Store rent305,00086,000121,00098,000
Depreciation of store fixtures16,5004,7006,1005,700
Delivery salaries21,3007,1007,1007,100
Depreciation of delivery
equipment
9,3003,1003,1003,100
Total selling expenses$819,000$232,400$315,500$271,100
*Allocated on the basis of sales dollars.
TotalNorth
Store
South
Store
East
Store
Administrative expenses:
Store managers' salaries$71,500$21,500$30,500$19,500
General office salaries*46,50011,00018,60016,900
Insurance on fixtures and inventory26,0007,8009,5008,700
Utilities109,54532,91041,38035,255
Employment taxes56,95516,29021,42019,245
General office—other*77,50017,50031,00029,000
Total administrative expenses$388,000$107,000$152,400$128,600
*Allocated on the basis of sales dollars.
  1. The lease on the building housing the North Store can be broken with no penalty.
  2. The fixtures being used in the North Store would be transferred to the other two stores if the North Store were closed.
  3. 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.
  4. 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.
  5. The company pays employment taxes equal to 15% of their employees' salaries.
  6. One-third of the insurance in the North Store is on the store’s fixtures.
  7. 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?

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