Superior Markets, Inc., operates three stores in a large metropolitan area. A se
ID: 2515853 • 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:
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 $11,000 per quarter. The general manager of the North Store would be retained at her normal salary of $12,000 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 $4,000 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.
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.
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.)
The North Store should not be closed.
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.)
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
Computation based on the data given:
Income Statement
For the Quarter Ended September 30
North
South
East
Total
Store
Store
Store
Sales
$3,000,000
$720,000
$1,200,000
$1,080,000
Cost of goods sold
1,657,200
403,200
660,000
594,000
Gross margin
1,342,800
316,800
540,000
486,000
Selling and administrative expenses:
Selling expenses:
Sales salaries
239,000
70,000
89,000
80,000
Direct advertising
187,000
51,000
72,000
64,000
General advertising
45,000
10,800
18,000
16,200
Store rent
300,000
85,000
120,000
95,000
Depreciation of store fixtures
16,000
4,600
6,000
5,400
Delivery salaries
21,000
7,000
7,000
7,000
Depreciation of delivery equipment
9,000
3,000
3,000
3,000
Total selling expenses
817,000
231,400
315,000
270,600
Administrative expenses:
Store management salaries
70,000
21,000
30,000
19,000
General office salaries
50,000
12,000
20,000
18,000
Insurance on fixtures and inventory
25,000
7,500
9,000
8,500
Utilities
106,000
31,000
40,000
35,000
Employment taxes
57,000
16,500
21,900
18,600
General office - other
75,000
18,000
30,000
27,000
Total administrative expenses
383,000
106,000
150,900
126,100
Total expenses
1,200,000
337,400
465,900
396,700
Net operating income (loss)
$ 142,800
$ (20,600)
$ 74,100
$ 89,300
Additional Data:
Manager's salary per quarter
$ 12,000
New employee's salary per quarter
$ 11,000
Employment tax as a percentage of salaries
15%
Delivery person's salary per quarter
$ 4,000
Insurance related to downtown fixtures
1/3
Discharged employee's salary per quarter
$ 6,000
Assumed sales transferred to East store
25%
Gross margin lost if store is closed
-316800
costs which can be avoided:
sales salaries
70000
direct advertising
51000
store rent
85000
delivery salaries
4000
store managemant salaries
9000
salary of new manager
11000
general office compensation
6000
insurance on inventories
5000
utilities
31000
employment taxes*
15000
287000
decrease in company net operating income if the downtown store is closed
*salaries avoided by closing the store:
sales salaries
70000
delivery salaries
4000
store managemant salaries
9000
salary of new manager
11000
general office compensation
6000
total avoided
100000
employment tax rate
15%
employment tax avoided
15000
Requirement 2:
Assuming that the store space cant be subleased , recommendation to the management of Superior markets ins is as under:
The North Store is supposed to not be closed. Because the company’s overall net income will reduced by $29,800 per quarter.
If the store room should not be subleased a decision to close the store would reason an even greater decline in the company’s overall net in-come.
Requirement 3:
computations:
Gross margin lost if the store is closed
-316800
Gross margin gained at the uptown store
81000
Net operating loss in gross margin
-235800
LESS: avoidable costs if North store is closed
287000
Net advantage of closing North store
51200
Superior markets inc.Income Statement
For the Quarter Ended September 30
North
South
East
Total
Store
Store
Store
Sales
$3,000,000
$720,000
$1,200,000
$1,080,000
Cost of goods sold
1,657,200
403,200
660,000
594,000
Gross margin
1,342,800
316,800
540,000
486,000
Selling and administrative expenses:
Selling expenses:
Sales salaries
239,000
70,000
89,000
80,000
Direct advertising
187,000
51,000
72,000
64,000
General advertising
45,000
10,800
18,000
16,200
Store rent
300,000
85,000
120,000
95,000
Depreciation of store fixtures
16,000
4,600
6,000
5,400
Delivery salaries
21,000
7,000
7,000
7,000
Depreciation of delivery equipment
9,000
3,000
3,000
3,000
Total selling expenses
817,000
231,400
315,000
270,600
Administrative expenses:
Store management salaries
70,000
21,000
30,000
19,000
General office salaries
50,000
12,000
20,000
18,000
Insurance on fixtures and inventory
25,000
7,500
9,000
8,500
Utilities
106,000
31,000
40,000
35,000
Employment taxes
57,000
16,500
21,900
18,600
General office - other
75,000
18,000
30,000
27,000
Total administrative expenses
383,000
106,000
150,900
126,100
Total expenses
1,200,000
337,400
465,900
396,700
Net operating income (loss)
$ 142,800
$ (20,600)
$ 74,100
$ 89,300
Additional Data:
Manager's salary per quarter
$ 12,000
New employee's salary per quarter
$ 11,000
Employment tax as a percentage of salaries
15%
Delivery person's salary per quarter
$ 4,000
Insurance related to downtown fixtures
1/3
Discharged employee's salary per quarter
$ 6,000
Assumed sales transferred to East store
25%
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