Question

Superior Markets, Inc., operates three stores in a large metropolitan area. A segmented absorption costing income statement for th 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 $4,500,000 $900,000 $1,800,000 Cost of goods sold 2,475,000 550,000 935,000 Gross margin 2,025,000 350,000 865,000 Selling and administrative expenses: Selling expenses 847,000 246,400 322,500 Administrative expenses 458,000 121,000 173,400 Total expenses 1,305,000 367,400 495,900 Net operating income (loss) $ 720,000 $(17,400) $ 369,100 East Store $1,800,000 990,000 810,000 2 78,100 163,600 441,700 368,300 $ The North Store has consistently shown losses over the past two years. For this reason, management is giving consideration to clo: 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 $ 237,000 180,000 67,500 300,000 23,500 25,500 13,500 $ 63,800 66,000 13,500 84,000 6,100 8,500 4,500 $ 71,000 87,000 27,000 117,000 7,500 8,500 4,500 $102,200 27,000 27,000 99,000 9,900 8,500 4,500

Answer 1

Salaries avoided will be as follows

Salary of new employee = 13,000

Delivery crew =$5500

Sales salaries = 63,800

Store manager salaries = 28,500-14,000 =$14,500

General office =7,000

Total salaries avoided =$103,800

Taxes avoided = 103800*15% =$15,570

C. Financial advantage of closing = costs avoided- margin lost

= direct advertising cost + store rent + insurance*2/3 + utilities +salaries + taxes - 350,000

= 66000+84000+13000*2/3 +26780 +103800+15570 - 350,000

=$(45,183.3)

Should.not be closed

E. Advantage = (810,000/1800,000)*900,000*1/4 - 45,183.3

=$56,066.67

Should be closed