Question

Superior Markets, Inc., operates three stores in a large metropolitan area. A segmented absorption costing income statement fo company for the last quarter is given below: Superior Markets, Inc. Income Statement For the Quarter Ended September 30 North Total Store Sales $4,000,000 $840,000 Cost of goods sold 2,200,000 495,000 Gross margin 1,800,000 345,000 Selling and administrative expenses: Selling expenses 837,000 241,400 Administrative expenses 433,000 116,000 Total expenses 1,270,000 357,400 Net operating income (loss) $ 530,000 $(12,400) South Store $1,600,000 847,000 753,000 East Store $1,560,000 858,000 702,000 320,000 165,900 485,900 267,100 275,600 151,100 426,700 275,300 $ $ The North Store has consistently shown losses over the past two years. For this reason, management is giving consideration to 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: North Store South Store Total 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 $ 235,000 175,000 60,000 310,000 21,000 24,000 12,000 $837,000 $ 55,200 61,000 12,600 95,000 5,600 8,000 4,000 $ 83,000 82,000 24,000 112,000 7,000 8,000 4,000 $320,000 $ 96,800 32,000 23,400 103,000 8,400 8,000 4,000 $275,600 $241,400 *Allocated on the basis of sales dollars. Total North Store South Store East Store Administrative expenses: Store managers' salaries General office salaries Insurance on fixtures and inventory $ 85,000 60,000 35,000 $ 26,000 12,600 10,500 $ 35,000 24,000 14,000 $ 24,000 23,400 10,500

Answer 1

1) Employee Salaries savings Sales salaries Delivery salaries Store manager salaries (26,000 - 12,600) Salary of new manager General office compensation Total Salary saving 55,200 5,000 13,400 11,600 6,300 91,500 Employee Salaries 91,500 2) Employment taxes avoided Total Salary Saving Employement tax Employment tax saving (91,500 x 15%) 91,500 15% 13,725 Employement Taxes 13,725

(345,000) 3. Calculation of financial advantage (disadvantage) Gross Margin lost if North store closed Cost that can be saved: Sales salaries Direct advertising Store rent Delivery salaries Store manager salaries Salary of New manager General office compensation Insurance on inventories (10,500 x 2/3) Utilities Employement taxes Total Cost that can be avoided Financial advantage (disadvantage) 55,200 61,000 95,000 5,000 13,400 11,600 6,300 7,000 30,630 13,725 298,855 (46,145) Financial advantage (disadvantage) (46,145) 4) The North Store should not be closed. Based on the calculation on part 3, North store should not be closed because it will result in the reduction of profit by $46,145.

Gross Margin % of East store (702,000 / 1,560,000) Sales transfer to east store (840,000 x 1/4) 45% 210,000 Gross Margin lost if the North store is closed Gross Margin gained from east store (210,000 x 45%) Net Operating gain (loss) in gross margin Total cost that can be avoided Net Advantage (disadvantage) of closing Norht store (345,000) 94,500 (250,500) 298,855 48,355 Financial advantage (disadvantage) 48,355