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:

Answer 1

1) Delivery salaries Salary of new manager General office compensation Sales salaries Store management salaries (23000-11200) salaries that can be avoided 4,400 10,200 5,600 64,500 11,800 96,500 2) empoyee tax that can be avoided = 96500* 15% 14,475 3) -320,000 Gross margin lost if the store is closed Costs that can be avoided: salaries that can be avoided empoyee tax that can be avoided Utilities Store rent Insurance on inventories (8700*2/3) Direct advertising Total costs that can be avoided Net financial advantage (disadvantage) of closing the North store 96,500 14,475 32,685 89,000 5,800 55,000 293,460 - 26,540 4. North store should not be closed as it result in net financial disadvantages of $26540. 5) -320,000 83,250 Gross margin lost if the North Store is closed Gross margin gained from the East Store = 740000*0.25*585000/1300000 Net operating (loss) in gross margin costs that can be avoided if the North Store is closed Net advantage (disadvantage) of closing the North store -236,750 293,460 56,710