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	$	4,600,000		$	920,000		$	1,840,000		$	1,840,000
Cost of goods sold		2,530,000			565,000			953,000			1,012,000
Gross margin		2,070,000			355,000			887,000			828,000
Selling and administrative expenses:
Selling expenses		849,000			247,400			323,000			278,600
Administrative expenses		463,000			122,000			174,900			166,100
Total expenses		1,312,000			369,400			497,900			444,700
Net operating income (loss)	$	758,000		$	(14,400	)	$	389,100		$	383,300

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	$	230,400	$	62,200	$	68,600	$	99,600
Direct advertising		181,000		67,000		88,000		26,000
General advertising*		69,000		13,800		27,600		27,600
Store rent		305,000		85,000		118,000		102,000
Depreciation of store fixtures		24,000		6,200		7,600		10,200
Delivery salaries		25,800		8,600		8,600		8,600
Depreciation of delivery equipment		13,800		4,600		4,600		4,600
Total selling expenses	$	849,000	$	247,400	$	323,000	$	278,600

*Allocated on the basis of sales dollars.

	Total		North Store		South Store		East Store
Administrative expenses:
Store managers' salaries	$	94,000	$	29,000	$	38,000	$	27,000
General office salaries*		69,000		13,800		27,600		27,600
Insurance on fixtures and inventory		41,000		12,300		17,000		11,700
Utilities		81,120		26,860		24,880		29,380
Employment taxes		62,880		17,040		21,420		24,420
General office—other*		115,000		23,000		46,000		46,000
Total administrative expenses	$	463,000	$	122,000	$	174,900	$	166,100

*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 $12,800 per quarter. The general manager of the North Store would continue to earn her normal salary of $13,800 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 $5,600 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 $6,900 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

1) $41,500 it will avoid if North store is closed.

Stores Manager's salaries $29,000

Delivery person $5,600

General office-Other $6,900

Total $41,500

2) The taxes paid are 15% of the employees salary. Hence, 15% of $41500 = $6,225.

3) The company is incurring losses for the past 2 years. The financial advantage of closing North Store is the net operating income of the company will increase by $14,400.

4) If the Nort Store space can't be subleased, then closing the North Store is not recommended.

5) There is a financial advantage if North Store is closed. The expenses that were incurred in North Store like employees cost, administrative and selling expenses will cease. Since, East store has additional capacity, the cost per production will go down which will increase the profit of the company.