7. Superior Markets, Inc., operates three stores in a large metropolitan area. A
ID: 2600072 • Letter: 7
Question
7. 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 $13,000 per quarter. The general manager of the North Store would continue to earn her normal salary of $14,000 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 $5,500 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 $7,000 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 $ 4,500,000 $ 900,000 $ 1,800,000 $ 1,800,000 Cost of goods sold 2,475,000 550,000 935,000 990,000 Gross margin 2,025,000 350,000 865,000 810,000 Selling and administrative expenses: Selling expenses 847,000 246,400 322,500 278,100 Administrative expenses 458,000 121,000 173,400 163,600 Total expenses 1,305,000 367,400 495,900 441,700 Net operating income (loss) $ 720,000 $ (17,400 ) $ 369,100 $ 368,300 Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 Required 4 Required 5 How much employee salaries will the company avoid if it closes the North Store? Employee salaries
Explanation / Answer
(1) and (2)
Gross margin lost if the store is closed.................................
$(350,000)
Costs that can be avoided:
Sales salaries....................................................................
$63,800
Direct advertising.............................................................
66,000
Store rent.........................................................................
84,000
Delivery salaries..............................................................
5,500
Store management salaries
($28,500 – $14,000)....................................................
14,500
Salary of new manager....................................................
13,000
General office compensation...........................................
7,000
Insurance on inventories ($12,000 × 2/3)........................
8,000
Utilities............................................................................
326,780
Employment taxes...........................................................
15,000
*
287,000
Decrease in company profits if the North Store is closed....
$ (29,800)
*Salaries avoided by closing the store:
Sales salaries...................................................................
$63,800
Delivery salaries..............................................................
5,500
Store management salaries..............................................
14,500
Salary of new manager....................................................
13,000
General office compensation..........................................
7,000
Total avoided......................................................................
103,800
Employment tax rate...........................................................
×15%
Employment taxes avoided.................................................
$15,570
(3) and (4)
Based on the data in (1), the North Store should not be closed. If the store is closed, then the company’s overall net operating income will decrease by $46,420 per quarter. If the store space cannot be subleased or the lease broken without penalty, a decision to close the store would cause an even greater decline in the company’s overall net income. If the $84,000 rent cannot be avoided and the North Store is closed, the company’s overall net operating income would be reduced by $130,420 per quarter ($46,420 + $84,000).
(5)
Under these circumstances, the North Store should be closed. The computations are as follows:
Gross margin lost if the North Store is closed (part 1)...............................
$(350,000)
Gross margin gained from the East Store: $900,000 × 1/4 = $225,000; $225,000 × 45%* = $101,250.................................................................
101,250
Net operating loss in gross margin..............................................................
(248,750)
Less costs that can be avoided if the North Store is closed (part 1)..........
303,580
Net advantage of closing the North Store..................................................
$ 54,830
*The East Store’s gross margin percentage is:
$810,000 ÷ $1,800,000 = 45%
Gross margin lost if the store is closed.................................
$(350,000)
Costs that can be avoided:
Sales salaries....................................................................
$63,800
Direct advertising.............................................................
66,000
Store rent.........................................................................
84,000
Delivery salaries..............................................................
5,500
Store management salaries
($28,500 – $14,000)....................................................
14,500
Salary of new manager....................................................
13,000
General office compensation...........................................
7,000
Insurance on inventories ($12,000 × 2/3)........................
8,000
Utilities............................................................................
326,780
Employment taxes...........................................................
15,000
*
287,000
Decrease in company profits if the North Store is closed....
$ (29,800)
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