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 breakdown of the selling and administrative expenses that are shown above is as follows:

*Allocated on the basis of sales dollars.

*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 $11,000 per quarter. The general manager of the North Store would continue to earn her normal salary of $12,000 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 $4,700 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 $6,000 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?

Superior Markets, Inc.
Income Statement
For the Quarter Ended September 30 Total North
Store South
Store East
Store Sales $ 3,700,000 $ 800,000 $ 1,480,000 $ 1,420,000 Cost of goods sold 2,035,000 460,000 794,000 781,000 Gross margin 1,665,000 340,000 686,000 639,000 Selling and administrative expenses: Selling expenses 831,000 238,400 318,500 274,100 Administrative expenses 418,000 113,000 161,400 143,600 Total expenses 1,249,000 351,400 479,900 417,700 Net operating income (loss) $ 416,000 $ (11,400 ) $ 206,100 $ 221,300

Explanation / Answer

1. Employee salaries that the company will avoid if it closes the North store Store manager's salaries $12,500 Delivery person salary $4,700 Sales salaries $59,700 General Office salaries $6,000 Salary of new manager $11,000 Total employee salaries avoided $93,900 2. Employment tax that the company will avoid if it closes the north store Employment tax rate 15% Employee salaries avoided $93,900 Employment tax avoided $14,085 3. Financial advantage/(disadvantage) of closing North store Simplest approach to this is Gross margin lost ($340,000) Cost that can be avoided: Employee salaries $93,900 Employment tax $14,085 Direct advertising $58,000 Store Rent $92,000 Insurance on inventory (9600 x 2/3) $6,400 Utilities $31,315 $295,700 Financial (disadvantage) of closing the North store ($44,300) 4. Based on the data in requirement 3, the company should not close North store as it will be losing gross margin of $44300 per quarter. If the North store's floor space can't be subleased or broken the lease without penalty, the condition will be more worse as the company has to pay a rent of $92000 per quarter, and it will increase the loss from $44300 to $136300 per quarter 5. Financial advantage (disadvantage) if 1/4 sales of North store would transfer to East store Gross margin lost of North Store ($340,000) Sales transferred to East Store (800000 x 1/4) Gross margin gained from transfer to East Store (200000 x 45%) $90,000 Net operating loss in gross margin ($250,000) Cost that can be avoided (requirement 3) $295,700 Financial advantage of closing the North store $45,700 Note: The East store gross margin percentage = $639000/$1420000 x 100 = 45%

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