Question

Problem 11-26 Close or Retain a Store [LO11-2] 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 East Total Store Store Store Sales $4,180, eee $860, eee $1,640, eee $1,680, eee Cost of goods sold 2,255,000 515, eee 860.ee 880, ee Gross margin 1,845,000 345, Bee 780,000 720,000 Selling and administrative expenses: Selling expenses 839,000 242,400 320,500 276, 100 Administrative expenses 438,00 117,000 167,400 153,600 Total expenses 1,277,000 359,400 487,999 429,790 Net operating income (loss) $ 568, eee $(14,400) $ 292,100 $ 299, 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 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 $ 263,480 176,888 61,500 280, Bee 21,5ee 24, 380 $ 69,680 62,888 12,980 80,000 5,789 8,180 $ 80,680 83, eee 24,680 113,00 7,180 8,180 $113, 2ee 31,800 24.ee 87,880 8, 7ee 8,1ee 12,380 $839,800 4,180 $ 242,480 4,180 $320,500 4,1ee $ 276, 100 *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 Utilities Employment taxes General office-other Total administrative expenses $ 86,580 61,5ee 36,880 86,145 65,355 102,580 $438,080 $ 26,580 12,980 12,800 27,735 17,565 21,5ee $117,eee $ 35,580 24,600 14,500 29,480 22,320 1,88 $167,480 $ 24,500 24,000 12,700 28,930 25,479 40,88 $153,680 *Allocated on the basis of sales dollars.

Answer 1

Solution 1
Computation of Avoidable Employee Salaries
Sales salaries	69600
Delivery Salaries	5100
Store manager Salaries (26500-12900)	13600
General office salaries	6450
Salary of New manager	11900
Total	106650
Solution 2
Computation of Avoidable Employment Taxes
Avoidable employee Salaries	106650
*Employment tax rate	15%
Avoidable Employment Taxes	15998
Solution 3
Computation of financial advantage (disadvantage) of closing the North Store
Gross Margin lost if North store closed		-345000
Cost that can be avoided:
Sales salaries	69600
Delivery Salaries	5100
Store manager Salaries (26500-12900)	13600
General office salaries	6450
Salary of New manager	11900
Employment Tax	15998
Direct Advertising	62000
Store Rent	80000
Insurance on Inventory (10800*2/3)	7200
Utilities	27735
Total Cost Avoided		299583
Financial advantage (Disadvantage) of Closing North Store		-45418
Solution 4:
No, we would not recommend closing the North Store as there is net financial disadvantage of ($45418).
Solution 5:
Contribution margin ratio of East store
Gross Margin of East store	720000
Sales of East Store	1600000
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	-345000
Gross Margin gained from east store ($860,000*1/4*45%)	96750
Net loss of Gross Margin	-248250
Less: Total Cost that can be avoided (Computed in part 3)	299583
Financial advantage (disadvantage) of closing the North Store	51333