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
	Total			North Store			South Store			East Store
Sales	$	4,400,000		$	880,000		$	1,760,000		$	1,760,000
Cost of goods sold		2,420,000			525,000			927,000			968,000
Gross margin		1,980,000			355,000			833,000			792,000
Selling and administrative expenses:
Selling expenses		845,000			245,400			322,000			277,600
Administrative expenses		453,000			120,000			171,900			161,100
Total expenses		1,298,000			365,400			493,900			438,700
Net operating income (loss)	$	682,000		$	(10,400	)	$	339,100		$	353,300

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:

1. 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	$	243,600	$	65,400	$	73,400	$	104,800
Direct advertising		179,000		65,000		86,000		28,000
General advertising*		66,000		13,200		26,400		26,400
Store rent		295,000		83,000		116,000		96,000
Depreciation of store fixtures		23,000		6,000		7,400		9,600
Delivery salaries		25,200		8,400		8,400		8,400
Depreciation of delivery equipment		13,200		4,400		4,400		4,400
Total selling expenses	$	845,000	$	245,400	$	322,000	$	277,600

*Allocated on the basis of sales dollars.

	Total		North Store		South Store		East Store
Administrative expenses:
Store managers' salaries	$	91,000	$	28,000	$	37,000	$	26,000
General office salaries*		66,000		13,200		26,400		26,400
Insurance on fixtures and inventory		39,000		11,700		16,000		11,300
Utilities		83,130		27,850		26,720		28,560
Employment taxes		63,870		17,250		21,780		24,840
General office—other*		110,000		22,000		44,000		44,000
Total administrative expenses	$	453,000	$	120,000	$	171,900	$	161,100

*Allocated on the basis of sales dollars.

1. The lease on the building housing the North Store can be broken with no penalty.

2. The fixtures being used in the North Store would be transferred to the other two stores if the North Store were closed.

3. The general manager of the North Store would be retained and transferred to another position in the company if the North Store were closed. She would be filling a position that would otherwise be filled by hiring a new employee at a salary of $12,200 per quarter. The general manager of the North Store would continue to earn her normal salary of $13,200 per quarter. All other managers and employees in the North store would be discharged.

4. The company has one delivery crew that serves all three stores. One delivery person could be discharged if the North Store were closed. This person’s salary is $5,400 per quarter. The delivery equipment would be distributed to the other stores. The equipment does not wear out through use, but does eventually become obsolete.

5. The company pays employment taxes equal to 15% of their employees' salaries.

6. One-third of the insurance in the North Store is on the store’s fixtures.

7. The “General office salaries” and “General office—other” relate to the overall management of Superior Markets, Inc. If the North Store were closed, one person in the general office could be discharged because of the decrease in overall workload. This person’s compensation is $6,600 per quarter.

8. Required:

9. 1. How much employee salaries will the company avoid if it closes the North Store?

10. 2. How much employment taxes will the company avoid if it closes the North Store?

    3. What is the financial advantage (disadvantage) of closing the North Store?

    4. Assuming that the North Store's floor space can’t be subleased, would you recommend closing the North Store?

    5. Assume that the North Store's floor space can’t be subleased. However, let's introduce three more assumptions. First, assume that if the North Store were closed, one-fourth of its sales would transfer to the East Store, due to strong customer loyalty to Superior Markets. Second, assume that the East Store has enough capacity to handle the increased sales that would arise from closing the North Store. Third, assume that the increased sales in the East Store would yield the same gross margin as a percentage of sales as present sales in the East store. Given these new assumptions, what is the financial advantage (disadvantage) of closing the North Store?

Answer 1

Solution 1
Computation of Avoidable Employee Salaries
Sales salaries	65400
Delivery Salaries	5400
Store manager Salaries (28000-13200)	14800
General office salaries	6600
Salary of New manager	12200
Total	104400
Solution 2
Computation of Avoidable Employment Taxes
Avoidable employee Salaries	104400
*Employment tax rate	15%
Avoidable Employment Taxes	15660
Solution 3
Computation of financial advantage (disadvantage) of closing the North Store
Gross Margin lost if North store closed		-355000
Cost that can be avoided:
Sales salaries	65400
Delivery Salaries	5400
Store manager Salaries (28000-13200)	14800
General office salaries	6600
Salary of New manager	12200
Employment Tax	15660
Direct Advertising	65000
Store Rent	83000
Insurance on Inventory (11700*2/3)	7800
Utilities	27850
Total Cost Avoided		303710
Financial advantage (Disadvantage) of Closing North Store		-51290
Solution 4:
No, we would not recommend closing the North Store as there is net financial disadvantage of ($51290).
Solution 5:
Contribution margin ratio of East store
Gross Margin of East store	792000
Sales of East Store	1760000
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	-355000
Gross Margin gained from east store ($880,000*1/4*45%)	99000
Net loss of Gross Margin	-256000
Less: Total Cost that can be avoided (Computed in part 3)	303710
Financial advantage (disadvantage) of closing the North Store	47710