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	$	4,600,000		$	920,000		$	1,840,000		$	1,840,000
Cost of goods sold		2,530,000			565,000			953,000			1,012,000
Gross margin		2,070,000			355,000			887,000			828,000
Selling and administrative expenses:
Selling expenses		849,000			247,400			323,000			278,600
Administrative expenses		463,000			122,000			174,900			166,100
Total expenses		1,312,000			369,400			497,900			444,700
Net operating income (loss)	$	758,000		$	(14,400	)	$	389,100		$	383,300

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	$	230,400	$	62,200	$	68,600	$	99,600
Direct advertising		181,000		67,000		88,000		26,000
General advertising*		69,000		13,800		27,600		27,600
Store rent		305,000		85,000		118,000		102,000
Depreciation of store fixtures		24,000		6,200		7,600		10,200
Delivery salaries		25,800		8,600		8,600		8,600
Depreciation of delivery equipment		13,800		4,600		4,600		4,600
Total selling expenses	$	849,000	$	247,400	$	323,000	$	278,600

*Allocated on the basis of sales dollars.

	Total		North Store		South Store		East Store
Administrative expenses:
Store managers' salaries	$	94,000	$	29,000	$	38,000	$	27,000
General office salaries*		69,000		13,800		27,600		27,600
Insurance on fixtures and inventory		41,000		12,300		17,000		11,700
Utilities		81,120		26,860		24,880		29,380
Employment taxes		62,880		17,040		21,420		24,420
General office—other*		115,000		23,000		46,000		46,000
Total administrative expenses	$	463,000	$	122,000	$	174,900	$	166,100

*Allocated on the basis of sales dollars.

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

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

4. 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 $12,800 per quarter. The general manager of the North Store would continue to earn her normal salary of $13,800 per quarter. All other managers and employees in the North store would be discharged.

5. 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 $5,600 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.

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

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

8. 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 $6,900 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

1	Salaries which can be avoided,
	Sales salaries				62200
	Delivery salaries				5600
	Store management salaries (29000-13800)				15200
	Salary of new manager				12800
	General office compensation				6900
	Total				102700
2	Employment taxes which can be avoided=Salaries which can be avoided*15%=102700*15%=$ 15405
3					$	$
	Gross margin lost if north store is closed					-355000
	Savings in cost:
	Store rent				85000
	Sales salaries				62200
	Direct advertising				67000
	Delivery salaries				5600
	Store management salaries				15200
	Salary of new manager				12800
	General office compensation				6900
	Insurance	(12300*2/3)			8200
	Utilities				26860
	Employment taxes				15405	305165
	Decrease in net profit if North store is closed					-49835
	Financial disadvantage of closing North store=$ 49835
4					$	$
	Gross margin lost if north store is closed					-355000
	Savings in cost:
	Store rent				0
	Sales salaries				62200
	Direct advertising				67000
	Delivery salaries				5600
	Store management salaries				15200
	Salary of new manager				12800
	General office compensation				6900
	Insurance	(12300*2/3)			8200
	Utilities				26860
	Employment taxes				15405	220165
	Decrease in net profit if North store is closed					-134835
	Financial disadvantage of closing North store=$ 134835
	North store should not be closed since it results in a financial disadvantage of $ 134835
5	Gross margin earned from East store
	Gross margin % of east store=Gross margin/Sales=828000/1840000=0.45=45%
	Sales transferred from North to East store=1/4 th of sales=920000*1/4=$ 230000
	Gross margin earned from sales transferred=230000*45%=$ 103500
	If floor space can't be subleased,Then threre is no savings in store rent.
	Savings in cost=$ 220165
	Gross margin lost if north store is closed					-355000
	Gross margin earned from East store (Note:2)					103500
	Net gross margin lost					-251500
	Savings in cost					220165
	Net disadvantage of closing north store					-31335