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:

For the Quarter Ended September 30 North Store South Store East Store Total $4,700,000 2,585,000 2,115,000 Sales Cost of goods sold Gross margin Selling and administrative expenses Selling expenses Administrative expenses Total expenses $940,000 580,000 360,000 $1,880,000 $1,880,000 971,000 909,000 1,034,000 846,000 248,400 123,000 371,400 851,000 468,000 1,319,000 323,500 176,400 499,900 $(11,400) $409,100 $ 398,300 279,100 168,600 447,700 $796,000 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 advertis ing General advertising* Store rent $ 80,200 89,000 28,200 105,000 7,700 8,700 $60,600 68,000 14,100 86,000 6,300 8,700 $252,800 182,000 70,500 281,000 24,500 26,100 $112,000 25,000 28,200 90,000 10,500 8,700 Depreciation of store fixtures Delivery salaries Depreciation of delivery equipment Total selling expenses 4,700 14,100 4,700 4,700 $851,000 $248,400 $323,500 $279,100

Answer 1

1.Salary of new employee = $13,200

Delivery crew = $5,700

Sales Salaries = $60,600

Store manager Salaries = $29,500- 14,200 = $15,300

General Office Salaries = $7,100

Employee Salaries Avoided per Quarter = $101,900

2.Employment Taxes Avoided = 101,900*15% = $15,285

3.Financial Advantage = costs avoided –margin lost

= Direct Advertising cost + Store Rent +2/3^rd Insurance +Utilities + Salaries Avoided + Taxes Avoided- 360,000

= 68,000 + 86,000 + 12,600*2/3 + 26,250 + 101,900 + 15,285 – 360,000

= -$54,165 i.e. disadvantage

4.North store should not be closed, as there is a loss in closing the store

5.Financial Advantage of closing the north store = Gross Margin from Increased sales of East Store – Disadvantage calculated above

= (846,000/1,880,000)*940,000*1/4 – 54,165

=$51,585

Since there is net advantage, the store should be closed.