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: Superior Markets, Inc Income Statement For the Quarter Ended September 30 North Store South Store Cast Store Total Sales Cost of goods sold Gross margin Selling and administrative expenses: $3,200,000 $740,000 $1,280,000 $1,180,000 649,000 531,000 1,760,000 1,440,000 423,000 317,000 688,000 592,000 316,000 153,900 469,900 (24,400) 122,100 128,300 271,600 131,100 402,700 Selling expenses Administrative expenses 393,000 1,214,000 $ 226,000 821,000 233,400 108,000 341,400 Total expenses Net operating income (loss) 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 that are shown above is as follows:

Explanation / Answer

1. Employee salaries that the company will avoid if it closes the North store Store manager's salaries $10,800 Delivery person salary $4,200 Sales salaries $67,100 General Office salaries $5,600 Salary of new manager $10,200 Total employee salaries avoided $97,900 2. Employment tax that the company will avoid if it closes the north store Employment tax rate 15% Employee salaries avoided $97,900 Employment tax avoided $14,685 3. Financial advantage/(disadvantage) of closing North store Simplest approach to this is Gross margin lost ($317,000) Cost that can be avoided: Employee salaries $97,900 Employment tax $14,685 Direct advertising $53,000 Store Rent $87,000 Insurance on inventory (8100 x 2/3) $5,400 Utilities $32,075 $290,060 Financial (disadvantage) of closing the North store ($26,940) 4. Based on the data in requirement 3, the company should not close North store as it will be losing gross margin of $26940 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 $87000 per quarter, and it will increase the loss from $26940 to $113940 per quarter 5. Financial advantage (disadvantage) if 1/4 sales of North store would transfer to East store Gross margin lost of North Store ($317,000) Sales transferred to East Store (740000 x 1/4) Gross margin gained from transfer to East Store (185000 x 45%) $83,250 Net operating loss in gross margin ($233,750) Cost that can be avoided (requirement 3) $290,060 Financial advantage of closing the North store $56,310 Note: The East store gross margin percentage = $531000/$1180000 x 100 = 45%

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