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 $13,400 per quarter. The general manager of the North Store would be retained at her normal salary of $14,400 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 $5,800 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 $7,200 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.)

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: 1

Answer:3 a

Under these circumstances, the North Store should be closed. The computations are as follows:

Gross margin lost if the North Store is closed (part 1)....

$(360000)

Gross margin gained from the East Store: $960,000 × 1/4 = $240,000; $240,000 × 45%* = $108,000...........

    108,000

Net operating loss in gross margin...............................

(252,000)

Less costs that can be avoided if the North Store is closed (part 1)........................................................

   3063,50

Net advantage of closing the North Store.....................

$ 54350

    *The East Store’s gross margin percentage is:

           $864,000 ÷ $1,920,000 = 45%

Particulars Amount ($) Gross margin lost if the store is closed 360000 Costs that can be avoided: Utilities 25,870 Store rent 87000 Delivery Salaries 5800 Salary of new manager 13400 General office compensation 7200 Sales salaries 59000 Insurance on inventories 8600 Employment taxes 14880 Direct advertising 69000 Store management salaries 15600 306,350 Decrease in company net operating income 53,650

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