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 | $ | 4,500,000 | $ | 900,000 | $ | 1,800,000 | $ | 1,800,000 | ||||
Cost of goods sold | 2,475,000 | 550,000 | 935,000 | 990,000 | ||||||||
Gross margin | 2,025,000 | 350,000 | 865,000 | 810,000 | ||||||||
Selling and administrative expenses: | ||||||||||||
Selling expenses | 847,000 | 246,400 | 322,500 | 278,100 | ||||||||
Administrative expenses | 458,000 | 121,000 | 173,400 | 163,600 | ||||||||
Total expenses | 1,305,000 | 367,400 | 495,900 | 441,700 | ||||||||
Net operating income (loss) | $ | 720,000 | $ | (17,400 | ) | $ | 369,100 | $ | 368,300 | |||
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:
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 | $ | 237,000 | $ | 63,800 | $ | 71,000 | $ | 102,200 |
Direct advertising | 180,000 | 66,000 | 87,000 | 27,000 | ||||
General advertising* | 67,500 | 13,500 | 27,000 | 27,000 | ||||
Store rent | 300,000 | 84,000 | 117,000 | 99,000 | ||||
Depreciation of store fixtures | 23,500 | 6,100 | 7,500 | 9,900 | ||||
Delivery salaries | 25,500 | 8,500 | 8,500 | 8,500 | ||||
Depreciation of delivery equipment |
13,500 | 4,500 | 4,500 | 4,500 | ||||
Total selling expenses | $ | 847,000 | $ | 246,400 | $ | 322,500 | $ | 278,100 |
*Allocated on the basis of sales dollars.
Total |
North Store |
South Store |
East Store |
|||||
Administrative expenses: | ||||||||
Store managers' salaries | $ | 92,500 | $ | 28,500 | $ | 37,500 | $ | 26,500 |
General office salaries* | 67,500 | 14,000 | 27,000 | 26,500 | ||||
Insurance on fixtures and inventory | 40,000 | 12,000 | 16,500 | 11,500 | ||||
Utilities | 82,125 | 26,780 | 25,800 | 29,545 | ||||
Employment taxes | 63,375 | 17,220 | 21,600 | 24,555 | ||||
General office—other* | 112,500 | 22,500 | 45,000 | 45,000 | ||||
Total administrative expenses | $ | 458,000 | $ | 121,000 | $ | 173,400 | $ | 163,600 |
*Allocated on the basis of sales dollars.
The lease on the building housing the North Store can be broken with no penalty.
The fixtures being used in the North Store would be transferred to the other two stores if the North Store were closed.
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.
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.
The company pays employment taxes equal to 15% of their employees' salaries.
One-third of the insurance in the North Store is on the store’s fixtures.
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 $7,000 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?
Part 1 - Total salary that can be avoided if North store is closed.
Data for quarter ended 30th september.
Particulars | Amount |
Sales salary (Relevant gain) | $63800 |
Delivery salary (Relevant gain) | $5500 |
Store management salary (Relevant gain) ($28500 - $14000) |
$14500 |
Salary of new Manager (Relevant gain) | $13000 |
General Officer compensation (relevant gain) | $7000 |
Total salary avoided | $103800 |
Part 2 Employment taxes avoided
Particulars | Amount |
Total salary avoided | $103800 |
Employment tax rate | 15% |
Total employment tax avoided | $15570 |
Part 3 Financial advantage/Disadvantage of shutting down North store
Costs which are allocated are not avoidable since these costs fully absorbed.
Particulars | Amount |
Relevant cost = Gross margin lost (A) | $350000 |
Less : Relevant gain (Costs avoided) (B) | |
Insurance ($12000 * 2/3) | $8000 |
Salary cost avoided | $103800 |
Employment tax avoided | $15570 |
Direct advertising | $66000 |
Store rent | $84000 |
Utilities | $26780 |
Net Disadvantage | $45850 |
As per analysis, North store should not be closed. If store is closed then income of company as a whole would be reduced by $45850
Part 4 - If office space cant not be subleased then rent cosr of north store could not be avoided and in such cases total effect on income would be ($45850 + $84000 = $129850)
hence Total income would be reduced by $129850
decision = Store should not be closed
Part -5 = Advantage/Disadvantage of closing north store if north store can't be subleased.
Particulars | Amount |
Gross Margin lost from north store | $350000 |
Less : Gross margin gain from east store ($900000 * 1/4) * (810000/1800000 *100) |
$101250 |
Net Operating loss in gross margin | $248750 |
Less : Costs avoided on closing north stors ($8000 + $103800 + $15570 + $66000 + $84000 + $26780) |
$304150 |
Net advantage of closing the north store | $55400 |
Superior Markets, Inc., operates three stores in a large metropolitan area. A segmented absorption costing income...
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 $ 4,500,000 $ 900,000 $ 1,800,000 $ 1,800,000 Cost of goods sold 2,475,000 550,000 935,000 990,000 Gross margin 2,025,000 350,000 865,000 810,000 Selling and administrative expenses: Selling expenses 847,000 246,400 322,500 278,100 Administrative expenses...
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., 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 South Total store Store Sales $4,100,000 $860.000 $1.640.000 Cost of goods sold 2,255,000 515,000...
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...
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 Total Store Sales $4,600,000 $920,000 Cost of goods sold 2,530,000 565,000 Gross margin 2,070,000 355,000 Selling and administrative expenses: Selling expenses 849,000 247,400 Administrative expenses 463,000 122,000 Total expenses 1,312,000 369,400 Net operating income (loss) $ 758,000 $(14,400) South Store $1,840,000...
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...
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 South Total Store Store Sales $4,000,000 $840,000 $1,600,000 Cost of goods sold 2,200,000 495,000 847,000 Gross margin 1,800,000 345,000 7 53,000 Selling and administrative expenses : Selling expenses 837,000 241,400 320,000 Administrative expenses 433.000 116,000 165,900 Total expenses 1,270,000 357,400 485,900...
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...
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 $ 4,200,000 $ 840,000 $ 1,680,000 $ 1,680,000 Cost of goods sold 2,310,000 500,000 886,000 924,000 Gross margin 1,890,000 340,000 794,000 756,000 Selling and administrative expenses: Selling expenses 841,000 243,400 321,000 276,600 Administrative expenses...
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 $ 3,200,000 $ 740,000 $ 1,280,000 $ 1,180,000 Cost of goods sold 1,760,000 423,000 688,000 649,000 Gross margin 1,440,000 317,000 592,000 531,000 Selling and administrative expenses: Selling expenses 821,000 233,400 316,000 271,600 Administrative expenses...
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., 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 South Total Store Store Sales $4,600,000 $920,000 $1,840,000 Cost of goods sold 2,530,000 565,000...