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 Total Store $3,180,000 $ 780,000 1,756,800 436,800 South Store $1,260,000 693,000 East Store $1,140,000 627,000 Sales Cost of goods sold Gross margin 1,423,200 343,200 567,000 513,000 Selling and administrative expenses: Selling expenses: Administrative expenses 874,300 430,440 250,600 120,340 333,900 167,680 289,800 142,420 Total expenses 1,304,740 370,940 501,580 432,220 Net operating income (loss) $ 118,460 $ (27,740) $ 65,420 $ 80,780

Answer 1

Solution 1:

Computation of financial advantage (disadvantage) of closing the North Store
Gross Margin lost if North store closed		-343200
Cost that can be avoided:
Sales salaries	76000
Delivery Salaries	7000
Store manager Salaries (24000-15600)	8400
General office salaries	7800
Salary of New manager	14600
Employment Tax (113800*15%)	17070
Direct Advertising	54000
Store Rent	88000
Insurance on Inventory (8400*2/3)	5600
Utilities	34000
Total Cost Avoided		312470
Financial advantage (Disadvantage) of Closing North Store		-30730

Solution 2:

No, The north store should not be closed.

we would not recommend closing the North Store as there is net financial disadvantage of ($30730).

Solution 3:

a.

Contribution margin ratio of East store
Gross Margin of East store	513000
Sales of East Store	1140000
Contribution margin ratio of East Store	45.00%
Under New assumption: Computation of Financial advantage (disadvantage) of closing the North Store
Gross Margin lost if North store closed	-343200
Gross Margin gained from east store ($780,000*1/4*45%)	87750
Net loss of Gross Margin	-255450
Less: Total Cost that can be avoided (Computed in part 3)	312470
Financial advantage (disadvantage) of closing the North Store	57020

b.

The north store should be closed.