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 $4,200,000 $840,000 $1,680,eee Cost of goods sold 2,310,eee 500,000 886, eee Gross margin 1,890,00 340,00 794, 00 Selling and administrative expenses: Selling expenses 841,00 243,400 321,000 Administrative expenses 443,eee 118,80 168,900 Total expenses 1,284,00 361,488 489,900 Net operating income (loss) $ 606,000 $(21,400) $ 384,100 East Store $1,680,000 924, eee 7 56, 276,600 1 56, 100 432,700 323,380 $ 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 $ 256,800 177,eee 63,eee 285, eee 22,eee 24,600 12,600 $841,eee $ 68,600 63,eee 12,600 8 1, eee 5,800 8,200 4,200 $243,400 $ 78,200 84, eee 25,280 114, eee 7,200 8,280 4,200 $110, eee 30, eee 25, 2ee 90, eee 9, eee 8,200 4,200 $321,eee $276,600 *Allocated on the basis of sales dollars. North Total South Store East Store store Administrative expenses: Store managers' salaries General office salaries Insurance on fixtures and inventory Utilities Employment taxes General office-other Total administrative expenses $ 88,eee 63,eee 37, eee 85,140 64,860 105. eee $443, eee $ 27,eee 12,600 11,1e0 28,840 17,460 21.ee $118, eee $ 36,eee 25,280 1 5, eee 28,560 22,140 42,eee $168,900 $ 25, eee 25,280 10,900 27,740 25,260 42, eee $156,100

Answer 1

Solution 1
Computation of Avoidable Employee Salaries
Sales salaries	68600
Delivery Salaries	5200
Store manager Salaries (27000-12600)	14400
General office salaries	6300
Salary of New manager	11600
Total	106100
Solution 2
Computation of Avoidable Employment Taxes
Avoidable employee Salaries	106100
*Employment tax rate	15%
Avoidable Employment Taxes	15915
Solution 3
Computation of financial advantage (disadvantage) of closing the North Store
Gross Margin lost if North store closed		-340000
Cost that can be avoided:
Sales salaries	68600
Delivery Salaries	5200
Store manager Salaries (27000-12600)	14400
General office salaries	6300
Salary of New manager	11600
Employment Tax	15915
Direct Advertising	63000
Store Rent	81000
Insurance on Inventory (11100*2/3)	7400
Utilities	28840
Total Cost Avoided		302255
Financial advantage (Disadvantage) of Closing North Store		-37745
Solution 4:
No, we would not recommend closing the North Store as there is net financial disadvantage of ($37745).
Solution 5:
Contribution margin ratio of East store
Gross Margin of East store	756000
Sales of East Store	1680000
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	-340000
Gross Margin gained from east store ($840,000*1/4*45%)	94500
Net loss of Gross Margin	-245500
Less: Total Cost that can be avoided (Computed in part 3)	302255
Financial advantage (disadvantage) of closing the North Store	56755