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	$	3,400,000		$	740,000		$	1,360,000		$	1,300,000
Cost of goods sold		1,870,000			420,000			735,000			715,000
Gross margin		1,530,000			320,000			625,000			585,000
Selling and administrative expenses:
Selling expenses		825,000			235,400			317,000			272,600
Administrative expenses		403,000			110,000			156,900			136,100
Total expenses		1,228,000			345,400			473,900			408,700
Net operating income (loss)	$	302,000		$	(25,400	)	$	151,100		$	176,300

 

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	$	220,600	$	64,500	$	79,400	$	76,700
Direct advertising		183,000		55,000		76,000		52,000
General advertising*		51,000		11,100		20,400		19,500
Store rent		320,000		89,000		124,000		107,000
Depreciation of store fixtures		18,000		5,000		6,400		6,600
Delivery salaries		22,200		7,400		7,400		7,400
Depreciation of delivery equipment		10,200		3,400		3,400		3,400
Total selling expenses	$	825,000	$	235,400	$	317,000	$	272,600

*Allocated on the basis of sales dollars.

 

	Total		North Store		South Store		East Store
Administrative expenses:
Store managers' salaries	$	76,000	$	23,000	$	32,000	$	21,000
General office salaries*		51,000		11,100		20,400		19,500
Insurance on fixtures and inventory		29,000		8,700		11,000		9,300
Utilities		106,530		32,800		38,620		35,110
Employment taxes		55,470		15,900		20,880		18,690
General office—other*		85,000		18,500		34,000		32,500
Total administrative expenses	$	403,000	$	110,000	$	156,900	$	136,100

*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 $10,100 per quarter. The general manager of the North Store would continue to earn her normal salary of $11,100 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 $4,400 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 $5,550 per quarter.

 

Required:

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

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