Question

Problem 11-26 Close or Retain a Store [LO11-2]

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	$	4,800,000		$	960,000		$	1,920,000		$	1,920,000
Cost of goods sold		2,640,000			600,000			984,000			1,056,000
Gross margin		2,160,000			360,000			936,000			864,000
Selling and administrative expenses:
Selling expenses		853,000			249,400			324,000			279,600
Administrative expenses		473,000			124,000			177,900			171,100
Total expenses		1,326,000			373,400			501,900			450,700
Net operating income (loss)	$	834,000		$	(13,400	)	$	434,100		$	413,300

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:

	Total		North Store		South Store		East Store
Selling expenses:
Sales salaries	$	246,200	$	59,000	$	77,800	$	109,400
Direct advertising		183,000		69,000		90,000		24,000
General advertising*		72,000		14,400		28,800		28,800
Store rent		286,000		87,000		106,000		93,000
Depreciation of store fixtures		25,000		6,400		7,800		10,800
Delivery salaries		26,400		8,800		8,800		8,800
Depreciation of delivery equipment		14,400		4,800		4,800		4,800
Total selling expenses	$	853,000	$	249,400	$	324,000	$	279,600

*Allocated on the basis of sales dollars.

	Total		North Store		South Store		East Store
Administrative expenses:
Store managers' salaries	$	97,000	$	30,000	$	39,000	$	28,000
General office salaries*		72,000		14,400		28,800		28,800
Insurance on fixtures and inventory		43,000		12,900		18,000		12,100
Utilities		74,760		25,870		20,940		27,950
Employment taxes		66,240		16,830		23,160		26,250
General office—other*		120,000		24,000		48,000		48,000
Total administrative expenses	$	473,000	$	124,000	$	177,900	$	171,100

*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 $13,400 per quarter. The general manager of the North Store would continue to earn her normal salary of $14,400 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 $5,800 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 $7,200 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?

How much employee salaries will the company avoid if it closes the North Store?

Employee salaries

How much employment taxes will the company avoid if it closes the North Store?

Employment taxes

What is the financial advantage (disadvantage) of closing the North Store? (Enter any "disadvantages" as a negative value.)

Financial advantage (disadvantage)

Assuming that the North Store's floor space can’t be subleased, would you recommend closing the North Store?

	The North Store should be closed.radio button unchecked1 of 2 The North Store should not be closed.radio button unchecked2 of 2

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? (Enter any "disadvantages" as a negative value.)

Financial advantage (disadvantage)

Answer 1

1.Salary of new employee = $13,400

Delivery crew = $5,800

Sales Salaries = $59,000

Store manager Salaries = $30,000- 14,400 = $15,600

General Office Salaries = $7,200

Employee Salaries Avoided per Quarter = $101,000

2.Employment Taxes Avoided = 101,000*15% = $15,150

3.Financial Advantage = costs avoided –margin lost

= Direct Advertising cost + Store Rent +2/3rd Insurance +Utilities + Salaries Avoided + Taxes Avoided- 360,000

= 69,000 + 87,000 + 12,900*2/3 + 25,870 + 101,000 + 15,150 – 360,000

= -$53,380 i.e. disadvantage

4.North store should not be closed, as there is a loss in closing the store

5.Financial Advantage of closing the north store = Gross Margin from Increased sales of East Store – Disadvantage calculated above

= (864,000/1,920,000)*960,000*1/4 – 53,380

=$54,620

Since there is net advantage, the store should be closed.