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 $4,000,000 $840,000 $1,600,000 Cost of goods sold 2,200,000 495,000 847,000 Gross margin 1,800,000 345,000 7 53,000 Selling and administrative expenses : Selling expenses 837,000 241,400 320,000 Administrative expenses 433.000 116,000 165,900 Total expenses 1,270,000 357,400 485,900 Net operating income (loss) $ 530,000 $(12,400) $ 267,100 East Store $1,560,000 858,000 702,000 275,600 151,100 426,700 275, 300 $ The North Store has consistently shown losses over the past two years. For this reason, management is giving consideration to 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.Salary of new employee = $11,600

Delivery crew = $5,000

Sales Salaries = $55,200

Store manager Salaries = $26,000- 12,600 = $13,400

General Office Salaries = $6,300

Employee Salaries Avoided per Quarter = $91,500

2.Employment Taxes Avoided = 91,500*15% = $13,725

3.Financial Advantage = costs avoided –margin lost

= Direct Advertising cost + Store Rent +2/3^rd Insurance +Utilities + Salaries Avoided + Taxes Avoided- 345,000

= 61,000 + 95,000 + 10,500*2/3 + 30,630 + 91,500 + 13,725 – 345,000

= -$46,145 i.e. disadvantage

4.North store should not be closed, as there is a loss in closing the store

5.Financial Advantage of closing the north store = Gross Margin from Increased sales of East Store – Disadvantage calculated above

= (702,000/1,560,000)*840,000*1/4 – 46,145

=$48,355

Since there is net advantage, the store should be closed.