Superior Markets, Inc., operates three stores in a large metropolitan area. A se
ID: 2472751 • Letter: S
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
$
3,120,000
$
760,000
$
1,240,000
$
1,120,000
Cost of goods sold
1,723,600
425,600
682,000
616,000
Gross margin
1,396,400
334,400
558,000
504,000
Selling and administrative expenses:
Selling expenses:
855,200
244,200
327,600
283,400
Administrative expenses
418,460
116,480
163,620
138,360
Total expenses
1,273,660
360,680
491,220
421,760
Net operating income (loss)
$
122,740
$
(26,280
)
$
66,780
$
82,240
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 is as follows:
Total
North
Store
South
Store
East
Store
Selling expenses:
Sales salaries
$
251,000
$
74,000
$
93,000
$
84,000
Direct advertising
193,000
53,000
74,000
66,000
General advertising*
46,800
11,400
18,600
16,800
Store rent
306,000
87,000
122,000
97,000
Depreciation of store fixtures
19,400
5,800
7,000
6,600
Delivery salaries
27,000
9,000
9,000
9,000
Depreciation of delivery equipment
12,000
4,000
4,000
4,000
Total selling expenses
$
855,200
$
244,200
$
327,600
$
283,400
*Allocated on the basis of sales dollars.
Total
North
Store
South
Store
East
Store
Administrative expenses:
Store management salaries
$
76,000
$
23,000
$
32,000
$
21,000
General office salaries*
62,400
15,200
24,800
22,400
Insurance on fixtures and inventory
27,600
8,100
10,000
9,500
Utilities
112,000
33,000
42,000
37,000
Employment taxes
62,460
18,180
23,820
20,460
General office —other*
78,000
19,000
31,000
28,000
Total administrative expenses
$
418,460
$
116,480
$
163,620
$
138,360
*Allocated on the basis of sales dollars.
b.
The lease on the building housing the North Store can be broken with no penalty.
c.
The fixtures being used in the North Store would be transferred to the other two stores if the North Store were closed.
d.
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 $14,200 per quarter. The general manager of the North Store would be retained at her normal salary of $15,200 per quarter. All other employees in the store would be discharged.
e.
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 $6,000 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.
f.
The company’s employment taxes are 15% of salaries.
g.
One-third of the insurance in the North Store is on the store’s fixtures.
h.
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 $7,600 per quarter.
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.
a.
Calculate the net advantage of closing the North Store. (Any reductions or outflows should be indicated by a minus sign.)
Gross margin lost if the north store is closed
Gross margin gained from the east store
Net operating (loss) in gross margin
Less costs that can be avoided if the north store is closed
Net Advantage (disadvantage) of closing the north store
b.
What recommendation would you make to the management of Superior Markets, Inc.?
__The North Store should be closed.
__The North Store should not be closed.
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
a)
Gross margin lost if North store is closed = 334400
Gross margin gained from east store = 1/4th of Gross margin loss by North Stote
= 1/4 x 334400, = 83600
Net operating ( Loss) in gross margin = Loss - Gain
= 334400-83600, = 250800
Amounts that can be avoided if North Store is closed
Sales Salaries =74000
Direct Advertisement = 53000
Store Rent = 87000
Delivery Salaries = 6000
Store Management salaries =7800 ( 23000 total salary-15200 managers salary)
Insurance of Inventories= 8100 x 2/3 ( as 1/3 relates to fixture , remaining 2/3 relates to inventory)
= 5400
Utilities = 33000
General Overhead Salaries = 7600
Employment Tax = Salaries avoided x Employment Tax rate
Slaries avoided = 95400 ( 74000+6000+7800+7600) refer salary expense avoided above
Employment tax avoided = 95400 x 15% ,= 14310
Total Expenses that can be avoided = 288110
Loss of Margin = 250800
Net advantage of closing North Store = 288110-250800,= 37310
b) North store should be closed
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