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 Store South Store East Store Total Sales Cost of goods sold Gross margin Selling and administrative expenses: $4,500,000 $900,000 1,800,000 $1,800,000 990,000 810,000 2,475,000 550.000 935,000 865.000 2,025,000350,000 Selling expenes Administrative expenses 278,100 163,600 441,700 $ 720,000 (17,400) 369,100 368,300 847,000 246,400 458,000 121,000 367,400 322,500 173,400 495,900 Total expenses 1,305,000 Net operating income (loss) 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 East Store Total Selling expenses: Sales salaries Direct advertising General advertising* Store rent Depreciation of store fixtures Delivery salaries Depreciation of delivery $237,000 63,800 66,000 13,500 84,000 6,100 8,500 71,000 $102,200 27,000 27,000 99,000 9,900 8,500 180,000 67,500 300,000 23,500 25,500 13,500 87,000 27,000 117,000 7,500 8,500 4,500 4,500 4,500 equipment $847,000 $246,400 $322,500 $278,100 Total selling expenses Allocated on the basis of sales dollars North Store South Store East Store Total Administrative expenses: Store managers' salaries General office salaries Insurance on fixtures and $ 92,500 28,500 37,500 26,500 26,500 11,500 67,500 14,000 12,000 26,780 17,220 22,500 27,000 16,500 25,800 21,600 45,000 40,000 inventory Utilities Employment taxes General office-other* 29,545 24,555 45,000 $458,000 121,000 173,400 $163,600 82,125 63,375 112,500 Total administrative expenses Allocated on the basis of sales dollars. b. The lease on the building housing the North Store can be broken with no penalty C. The fixtures being used in the North Store would be transferred to the other two stores if the North Store were closed d. 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 $13,000 per quarter. The general manager of the North Store would continue to earn her normal salary of $14,000 per quarter. All other managers and employees in the North store would be discharged. e. 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 $5,500 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 f. The company pays employment taxes equal to 15% of their employees' salaries. g. One-third of the insurance in the North Store is on the store's fixtures. h. 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 $7000 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? 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? Required 1Required 2 Required 3 Required 4 Required 5 How much employee salaries will the company avoid if it closes the North Store? Employee salaries Required 1Required 2 Required 3 Required 4 Required 5 How much employment taxes will the company avoid if it closes the North Store? Employment taxes Required 3> Required 1 Required 1 Required 2Required 3Required 4 Required 5 What is the financial advantage (disadvantage) of closing the North Store? (Enter any "disadvantag Financial advantage (disadvantage) Required 2 Required4 Required 1 Required 2 Required 3 Required 4 Required 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? (Enter any "disadvantages" as a negative value.) Show lesS Financial advantage (disadvantage)

Answer 1

1)
Required 1
How much employee salaries will the company avoid if it closes the North Store?
Salaries avoided by closing the store:
Sales salaries	$63800.00
Delivery salaries	$5500.00
Store management salaries ($28500 -$14000)	$14500.00
Salary of new manager	$13000.00
General office compensation	$7000.00
Total avoided Employee salaries	$103800.00
Required 2
How much employment taxes will the company avoid if it closes the North Store?
Employment taxes = $103800 x 15%	$15570.00
Required 3
What is the financial advantage (disadvantage) of closing the North Store? (Enter any "disadvantages" as a negative value.)
Gross margin lost if the store is closed		-$350000.00
Less costs that can be avoided:
Sales salaries	$63800.00
Delivery salaries	$5500.00
Store rent	84000
Direct advertising	66000
Store management salaries	$14500
Salary of new manager	13000
General office compensation	7000
Insurance on inventories (12000 x 2/3)	8000.00
Utilities	26780
Employment taxes (calculated above )	15570	$304150.00
Increase / (Decrease) in net operating income if the North Store is closed
Financial advantage (disadvantage)	-$45850.00
Required 4
Assuming that the North Store's floor space can’t be subleased, would you recommend closing the North Store?
The North Store should not be closed.
If the store is closed, then the company’s overall net operating income will decrease by $45850per quarter. If the store space cannot be subleased or the lease broken without penalty, a decision to close the store would cause an even greater decline in the company’s overall net income.If the $84,000 rent cannot be avoided and the North Store is closed, the company’s overall net operating income would be reduced by $129850 per quarter ($45850 + $84,000)		129850
Required 5
Gross margin lost if the North Store is closed	-$350000.00
Gross margin gained from the East Store: $900,000 × 1/4 = $225000; $225000 × 45%*	$101250.00
Net operating loss in gross margin	-$248750.00
Less costs that can be avoided if the North Store is closed (part 1)	$304150.00
Net advantage of closing the North Store	$55400.00
The East Store’s gross margin percentage is: $810,000 ÷ $1800,000 =	45.00%