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., 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 $4,600,000 $920,000 $1,840,000 Cost of goods sold 2,530,000 565,000 953,000 Gross margin 2,070,000 355,000 887,000 Selling and administrative expenses: Selling expenses 849,000 247,400 323,000 Administrative expenses 463,000 122,000 174,900 Total expenses 1,312,000 369,400 4 97,900 Net operating income (loss) $ 758,000 $(14,400) $ 389,100 East Store $1,840,000 1,012,000 828,000 278,600 166,100 444,700 $ 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: 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 $230, 400 181,000 69,000 305,000 24,000 25,800 $ 62,200 67,000 13,800 85,000 6,200 8,600 $ 68,600 88,000 27,600 118,000 7,600 8,600 $ 99,600 26,000 27,600 102,000 10,200 8,600 13,800 $849,000 4,600 $247,400 4,600 $323,000 4,600 $278,600 *Allocated on the basis of sales dollars. North Store South Store East Store Total Administrative expenses: Store managers' salaries General office salaries* Insurance on fixtures and inventory Utilities Employment taxes General office-other* Total administrative expenses $ 94,000 69,000 41,000 81,120 62,880 115,000 $ 463,000 $ 29,000 13,800 12,300 26,860 17,040 23,000 $122,000 $ 38,000 27,600 17,000 24,880 21,420 46,000 $174,900 $ 27,000 27,600 11,700 29,380 24,420 46,000 $166,100 "Allocated on the basis of sales dollars.

Answer 1

SMC
1)	Gross Margin lost if the North Store would be closed down:($920000-$565000)	$                 -3,55,000.00
	Cost can be avoided due to closed down of North Store
	Sales Salaries	$                       62,200.00
	Direct Advertising	$                       67,000.00
	Store Rent	$                       85,000.00
	Delivery Salaries	$                         5,600.00
	Store Management Salaries($29000-$13800)	$                       15,200.00
	Salary of new manager	$                       12,800.00
	General office compensation	$                         6,900.00
	Insurance on Inventories($12300*2/3)	$                         8,200.00
	Utilities	$                       26,860.00
	Employment Taxes	$                       15,405.00
	Total Cost to be avoided	$                   3,05,165.00
	Decrease in Company's Profit due to North Store is closed=(-$355000+$305165)	$                     -49,835.00
2)	Calculation of saving of Employment Taxes=(15% of Salaries avoided)
	Sales Salaries	$                       62,200.00
	Delivery Salaries	$                         5,600.00
	Store Management Salaries	$                       15,200.00
	Salary of new manager	$                       12,800.00
	General office compensation(It is treated as part of salaries)	$                         6,900.00
	Total Salaries Avoided	$                   1,02,700.00
	Saving of Employments Taxes($102700*15%)	$                       15,405.00
3)	The net operating income of the company would be decreased by $49835 when North Store should be closed so it is preferable for a Company to continue North Store.
4)	If the Store Space cannot be subleased or the lease broken without penalty then Net operating income of North Store would be decreased by($49835+85000)=$134835 because store rent cannot be avoided due to close down north store.
5)	Gross Margin of East Store=(Gross Profit/Sales)*100=($828000/$1840000)*100	45%
	Gross Margin of 1/4 sales of East Store when 1/4 sales of North store transferred to East Store)
	1/4 Sales of North Store=($920000*1/4)	$                   2,30,000.00
	Gross Margin for $230000 Sales of East Store=($230000*45%)	$                   1,03,500.00
	Gross Margin lost due to closed down North Store	$                 -3,55,000.00
	Net Operating loss in gross margin	$                 -2,51,500.00
	Less: Cost to be avoided if the North Store closed down	$                   3,05,165.00
	Net advantage of closing the North Store($305165-$251500)	$                       53,665.00