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: Sales Superior Markets, Inc. Income Statement For the Quarter Ended September 30 North Total Store $3,100,000 $700,000 Cost of goods sold 1,705,000 380,000 Gross margin 1,395,000 320,000 Selling and administrative expenses: Selling expenses: 819,000 232,400 Administrative expenses 388,000 107,000 Total expenses 1,207,000 339,400 Net operating income (loss) $ 188,000 $(19,480) South Store $1,240,000 687,000 553,000 East Store $1,160,000 638,000 522,000 315,500 152,400 467,900 85,100 271,100 128,600 399,700 $ 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: a. The breakdown of the selling and administrative expenses is as follows Total North Store South Store East Store Selling expenses: Sales salaries Direct advertising General advertising Store rent Depreciation of store fixtures Delivery salaries Depreciation of delivery equipment Total selling expenses $240,400 180,000 46,500 305,000 16,500 21,300 9,300 $819,000 $ 69,000 52,000 10,500 86,000 4,700 7,100 3,100 $232,400 $ 86,600 73,000 18,600 121,000 6,100 7,100 3,100 $315,500 $ 84,800 55,000 17,400 98,000 5,700 7,100 3,100 $271,100 *Allocated on the basis of sales dollars. Total North Store South Store East Store Administrative expenses: Store management salaries General office salaries Insurance on fixtures and inventory Utilities Employment taxes General office -other* Total administrative expenses $ 71,500 46,500 26,000 109,545 56,955 77,500 388,000 $ 21,500 11,000 7,800 32,910 16,290 17,500 $107,000 $ 30,500 18,600 9,500 41,380 21,420 31,000 $152,400 $ 19,500 16,900 8,700 35,255 19,245 29,000 $128,600 $

Answer 1

Ans1:

Gross margin lost if the store is closed		3,80,000
Costs that can be avoided:
Selling Expenses:
Sales Salaries	48,000
Direct advertising	52,000
General advertising	10,500
Store rent	86,000
Depreciation of store fixtures	4,700
Delivery salaries	3,000
Depreciation of delivery equipment	3,100
Total selling expenses		2,07,300
Adminstrative Expenses
Store management salaries	21,500
General office salaries	5,500
Insurance on fixtures and inventory	32,910
Utilities	17,500
Employment taxes	11,415
General office other	17,500
Total Administrative expenses		1,06,325
Total Costs that can be avoided		3,13,625
Net Margin Lost		66,375

2. Based on the computations in (1) above the North Store should not be closed.

3. a)

Calculation of Net advantage of closing the North Store
Gross Margin lost if the North store is closed		-3,80,000
Gross Margin gained from the East store		5,22,000
Net operating(income) in gross margin		1,42,000
Less: Costs that can be avoided if the North Store is closed		3,13,625
Net advantage of closing the North Store		1,71,625

b)It is recommended that The North store should be closed according to above calculation with assumption