Question

Problem 6-26 (Algo) Close or Retain a Store [LO6-2] 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	$4,300,000	$860,000	$1,720,000	$1,720,000
Cost of Goods Sold	$2,365,000	$510,000	$909,000	$946,000
Gross Margin	$1,935,000	$350,000	$811,000	$774,000
Selling&Admin Expenses
Selling Expenses	$843,000	$244,400	$321,500	$277,100
Administrative Expenses	$448,000	$119,000	$170,400	$158,600
Total Expenses	$1,291,000	$363,400	$491,900	$435,700
Net Operating Income (loss)	$644,000	$(13,400)	$319,100	$338,300

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 that are shown above is as follows:

	Total	North Store	South Store	East Store
Selling Expenses:
Sales Salaries	$250,200	$67,000	$75,800	$107,400
Direct Advertising	$178,000	$64,000	$85,000	$29,000
General Advertising*	$64,500	$12,900	$25,800	$25,800
Store Rent	$290,000	$82,000	$115,000	$93,000
Depreciation of store fixtures	$22,500	$5,900	$7,300	$9,300
Delivery Salaries	$24,900	$8,300	$8,300	$8,300
Depreciation of delivery equipment	$12,900	$4,300	$4,300	$4,300
Total selling expenses	$843,000	$244,400	$321,500	$277,100
Administrative Expenses
Store managers' salaries	$89,500	$27,500	$36,500	$25,500
General office salaries*	$64,500	$13,000	$25,800	$25,700
Insurance on fixtures and inventory	$38,000	$11,400	$15,500	$11,100
Utilities	$84,135	$28,230	$27,640	$28,265
Employment Taxes	$64,365	$17,370	$21,960	$25,035
General office—other*	$107,500	$21,500	$43,000	$43,000
Total Administrative Expenses	$448,000	$119,000	$170,400	$158,600

*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 $12,000 per quarter. The general manager of the North Store would continue to earn her normal salary of $13,000 per quarter. All other managers and employees in the North 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 $5,300 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 pays employment taxes equal to 15% of their employees' 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 $6,500 per quarter.

Required: (I got 1, 2, and 4 and included their correct answers)

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

Answer: 105,300

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

Answer: $15,795

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?

Answer: The North Store should not be closed.

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.Salary of new employee = $12,000

Delivery crew = $5,300

Sales Salaries = $67,000

Store manager Salaries = $27,500- 13,000 = $14,500

General Office Salaries = $6,500

Employee Salaries Avoided per Quarter = $105,300

2.Employment Taxes Avoided = 105,300*15% = $15,795

3.Financial Advantage = costs avoided –margin lost

= Direct Advertising cost + Store Rent +2/3^rd Insurance +Utilities + Salaries Avoided + Taxes Avoided- 340,000

= 64,000 + 82,000 + 11,400*2/3 + 28,230 + 105,300 + 15,795 – 350,000

= -$47,075 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

= (774,000/1,720,000)*860,000*1/4 – 47,075

=$49,675

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