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

Explanation / Answer

Part 1 - Total salary that can be avoided if North store is closed.

Data for quarter ended 30th september.

Store management salary (Relevant gain)

($24500 - $12000)

Part 2 Employment taxes avoided

Part 3 Financial advantage/Disadvantage of shutting down North store

Costs which are allocated are not avoidable since these costs fully absorbed.

As per analysis, North store should not be closed. If store is closed then income of company as a whole would be reduced by $44300

Part 4 - If office space cant not be subleased then rent cosr of north store could not be avoided and in such cases total effect on income would be ($44300 + $92000 = $136300)

hence Total income would be reduced by $136300

decision = Store should not be closed

Part -5 = Advantage/Disadvantage of closing north store if north store can't be subleased.

Less : Gross margin gain from east store

($800000 * 1/4) * (639000/1420000 *100)

Less : Costs avoided on closing north stors

($6400 + $93900 + $14085 + $58000 + $92000 + $31315)

Particulars Amount Sales salary (Relevant gain) $59700 Delivery salary (Relevant gain) $4700

Store management salary (Relevant gain)

($24500 - $12000)

$12500 Salary of new Manager (Relevant gain) $11000 General Officer compensation (relevant gain) $6000 Total salary avoided $93900

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