PROBLEM 10-26A Close or Retain a Store [LO10-2] Superior Markets, Inc., operates

Question

PROBLEM 10-26A Close or Retain a Store [LO10-2] 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 East Store Total 1,657,200 403,200 316,800 660,000 540,000 594,000 486,000 1,342,800 Selling and administrative expenses 270,600 126,100 396,700 $ 142,800 $(20,600) $ 74,100 $89,300 817,000 231,400 106,000 1,200,000 337,400 315,000 150,900 465,900 383,000 The North Store has consistently shown losses over the past two years. For this reason, management is giv- ing 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:

Explanation / Answer

1). Changes in revenues:
Reduction in gross margin by $316,800

Reduction in expenses:
Reduction in salaries:
Sales Salaries            70000
Delivery salaries          4000
Store mgmt salaries     9000 (21000 - 12000)
General salaries          6000
New manager salary    11000
Total salary reduction    $100,000

Reduction of Direct Advertising = 51000
Reductioin of store rent              85000
Reduction of Utilities                  31000
Reduction of insurance               5000   (7500*2/3)
Reduction of Employment tax      15000 (100000*15%)
Total reduction of expenses      $287,000

Net disadvantage = 316800 - 287000 = $29800. This is the impact on company's net operating income

2). It is not recommended to close the north store even If store space can't be subleased because in first case the lease can be broken with no penalty even then there is net loss in closing the store.

3). If 1/4 of sales of north store can be tfd to east store.
Gross margin % of east store = 486000 / 1080000 = 45%
Sales of north store tfd = 720000 * 1/4 = $180,000
Gross margin on this part = 180000*45% = $81,000
Net loss in previous case when there is no sales tfr = $29800
Net advantage = 81000 -29800 = $51200
Now there is advantage, hence north store can be closed in this situation.

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