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 North South Total Store Store Sales $3,400,000 $ 740,000 $1,360,000 Cost of goods sold 1,870,000 420,000 735,000 Gross margin 1,530,000 320,000 625,000 Selling and administrative expenses: Selling expenses 825,000 235, 400 317,000 Administrative expenses 403,000 110,000 156,900 Total expenses 1, 228,000 345,400 473,900 Net operating income (loss) $ 302,000 $(25, 400) $ 151,100 East Store $1,300,000 715,000 585,000 272,600 136,100 408, 700 176,300 $ 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 Direct advertising General advertising* Store rent Depreciation of store fixtures Delivery salaries Depreciation of delivery equipment Total selling expenses $ 220, 600 183,000 51,000 320,000 18,000 22,200 10,200 $825,000 $ 64,500 55,000 11,100 89,000 5,000 7,400 3,400 $235, 400 $ 79, 400 76,000 20,400 124,000 6,400 7,400 3,400 $317,000 $ 76, 700 52,000 19,500 107,000 6,600 7,400 3,400 $272,600

Help with Questions 1,2,3 & 5

Answer 1

1.Salary of new employee = $10,200

Delivery crew = $4,400

Sales Salaries = $64,500

Store manager Salaries = $23,000- 11,200 = $11,800

General Office Salaries = $5,600

Employee Salaries Avoided per Quarter = $96,500

2.Employment Taxes Avoided = 96,500*15% = $14,475

3.Financial Advantage = costs avoided –margin lost

= Direct Advertising cost + Store Rent +2/3^rd Insurance +Utilities + Salaries Avoided + Taxes Avoided- 320,000

= 55,000 + 89,000 + 8,700*2/3 + 32,685 + 96,500 + 14,475 – 320,000

= -$26,540 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

= (585,000/1,300,000)*740,000*1/4 – 26,540

=$56,710

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