Superior Markets, Inc., operates three stores in a large metropolitan area. A se

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:

  

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 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 $10,400 per quarter. The general manager of the North Store would be retained at her normal salary of $11,400 per quarter. All other employees in the 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 $4,300 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 “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 $5,700 per quarter.

Prepare a schedule showing the change in revenues and expenses and the impact on the company’s overall net operating income that would result if the North Store were closed. (Any losses/ reductions should be indicated by a minus sign.)

      

Based on your computations in (1) above, what recommendation would you make to the management of Superior Markets, Inc.?

Assume that if the North Store were closed, at least one-fourth of its sales would transfer to the East Store, due to strong customer loyalty to Superior Markets. The East Store has enough capacity to handle the increased sales. You may assume that the increased sales in the East Store would yield the same gross margin as a percentage of sales as present sales in that store.

Calculate the net advantage of closing the North Store. (Any reductions or outflows should be indicated by a minus sign.)

          

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:

Explanation / Answer

Answer

Answer 1

Note : Allocated costs will be irrelevant for decision making as such costs are going to be incurred in any case.

Statement of change in net operating income of company if North store in closed

Figures in $

Particulars

Amount

Gross margin lost

-327000

lease saving on the building housing the North Store

88,000

Additional salary cost to general manager with employment taxes

-1150

(1000*1.15)

Sales salaries saving with employment taxes

75325

(65,500*1.15)  

Store management salaries saving with employment taxes

25875

(22,500*1.15)

One delivery person's Salary saving with employment taxes

4945

(4300*1.15)

Insurance cost saving

5600

(8,400*2)/3

Compensation saving of person in the general office with employment taxes

6555

(5700*1.15)

Direct advertising cost saving

54000

Utilities cost saving

31695  

Net loss if we close down North store

-155850

Answer 2

So if we close down North store, Net loss is -155850. If North store is continued to run then then loss is -16,400. So Loss is lower If North store is continued to run.

So The North Store should not be closed.

Statement of change in net operating income of company if North store in closed

Figures in $

Particulars

Amount

Gross margin lost

-327000

lease saving on the building housing the North Store

88,000

Additional salary cost to general manager with employment taxes

-1150

(1000*1.15)

Sales salaries saving with employment taxes

75325

(65,500*1.15)  

Store management salaries saving with employment taxes

25875

(22,500*1.15)

One delivery person's Salary saving with employment taxes

4945

(4300*1.15)

Insurance cost saving

5600

(8,400*2)/3

Compensation saving of person in the general office with employment taxes

6555

(5700*1.15)

Direct advertising cost saving

54000

Utilities cost saving

31695  

Net loss if we close down North store

-155850

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