Question

Problem 12-26 Close or Retain a Store [LO12-2]

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	$	3,000,000		$	720,000		$	1,200,000		$	1,080,000
Cost of goods sold		1,657,200			403,200			660,000			594,000
Gross margin		1,342,800			316,800			540,000			486,000
Selling and administrative expenses:
Selling expenses:		817,000			231,400			315,000			270,600
Administrative expenses		383,000			106,000			150,900			126,100
Total expenses		1,200,000			337,400			465,900			396,700
Net operating income (loss)	$	142,800		$	(20,600	)	$	74,100		$	89,300

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	$	239,000	$	70,000	$	89,000	$	80,000
Direct advertising		187,000		51,000		72,000		64,000
General advertising*		45,000		10,800		18,000		16,200
Store rent		300,000		85,000		120,000		95,000
Depreciation of store fixtures		16,000		4,600		6,000		5,400
Delivery salaries		21,000		7,000		7,000		7,000
Depreciation of delivery equipment		9,000		3,000		3,000		3,000
Total selling expenses	$	817,000	$	231,400	$	315,000	$	270,600

*Allocated on the basis of sales dollars.

	Total		North Store		South Store		East Store
Administrative expenses:
Store management salaries	$	70,000	$	21,000	$	30,000	$	19,000
General office salaries*		50,000		12,000		20,000		18,000
Insurance on fixtures and inventory		25,000		7,500		9,000		8,500
Utilities		106,000		31,000		40,000		35,000
Employment taxes		57,000		16,500		21,900		18,600
General office —other*		75,000		18,000		30,000		27,000
Total administrative expenses	$	383,000	$	106,000	$	150,900	$	126,100

*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 $11,000 per quarter. The general manager of the North Store would be retained at her normal salary of $12,000 per quarter. All other employees in the 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 $4,000 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’s employment taxes are 15% of 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 $6,000 per quarter.

Required:
1.	Prepare a schedule showing the change in revenues and expenses and the impact on the company’s overall net operating income that would result if the North Store were closed. (Any losses/ reductions should be indicated by a minus sign.)

      

2.	Based on your computations in (1) above, what recommendation would you make to the management of Superior Markets, Inc.?
	The North Store should be closed. The North Store should not be closed.

3.

Assume that if the North Store were closed, at least one-fourth of its sales would transfer to the East Store, due to strong customer loyalty to Superior Markets. The East Store has enough capacity to handle the increased sales. You may assume that the increased sales in the East Store would yield the same gross margin as a percentage of sales as present sales in that store.

a.	Calculate the net advantage of closing the North Store. (Any reductions or outflows should be indicated by a minus sign.)

          

b.	What recommendation would you make to the management of Superior Markets, Inc.?
	The North Store should be closed. The North Store should not be closed.

Answer 1

1.Salary of new employee = $11,000

Delivery crew = $4,000

Sales Salaries = $70,000

Store manager Salaries = $21,000- 12,000 = $9,000

General Office Salaries = $6,000

Employee Salaries Avoided per Quarter = $100,000

2.Employment Taxes Avoided = 100,000*15% = $15,000

3.Financial Advantage = costs avoided –margin lost

= Direct Advertising cost + Store Rent +2/3^rd Insurance +Utilities + Salaries Avoided + Taxes Avoided- 316,800

= 51,000 + 85,000 + 7,500*2/3 + 31,000 + 100,000 + 15,000 – 316,800

= -$29,800 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

= (486,000/1,080,000)*720,000*1/4 – 29,800

=$51,200

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