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 $3,300,000 $760,000 $1,320,000 Cost of goods sold 1,815,000 433,000 711,000 Gross margin 1,485,000 327,000 609,000 Selling and administrative expenses: Selling expenses 823,000 234,400 316,500 Administrative expenses 398,000 109,000 155,400 Total expenses 1,221,000343,400 471,900 Net operating income (loss) $ 264,000 $(16,400) $ 137,100 East Store $1,220,000 671,000 5 49,000 272,100 133,600 405, 700 143,300 $ 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: North Store South Store East Store Total Selling expenses:

Answer 1

1) Delivery salaries Salary of new manager General office compensation Sales salaries Store management salaries (22500-11400) salaries that can be avoided 4,300 10,400 5,700 65,500 11,100 97,000 2) empoyee tax that can be avoided = 97000*15% 14,550 3) -327,000 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 (8400* 2/3) Direct advertising Total costs that can be avoided Net financial advantage (disadvantage) of closing the North store 97,000 14,550 31,695 88,000 5,600 54,000 290,845 - 36,155 4. North store should not be closed as it result in net financial disadvantages of $36155 5) Gross margin lost if the North Store is closed Gross margin gained from the East Store = 760000*0.25*549000/1220000 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 - 327,000 85,500 - 241,500 290,845 49,345