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:

  

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 $10,000 per quarter. The general manager of the North Store would be retained at her normal salary of $11,000 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 $4,100 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 $5,500 per quarter.

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.)

      

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.)

          

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

Answer:1

Answer:2

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 $29925 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.

Answer:3 a

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)..

$(320000)

Gross margin gained from the south Store: $700,000 × 1/4 = $175,000; $175,000 × 44.6%* = $78,050........

    78,050

Net operating loss in gross margin............................

(241,950)

Less costs that can be avoided if the North Store is closed (part 1)......................................................

   290,075

Net advantage of closing the North Store...................

$ 48125

    *The south Store’s gross margin percentage is:

           $553,000 ÷ $1,240,000 = 44.6%

Answer:3 bThe North Store should be closed.

North Store Kept Open North Store Closed Difference: Net Operating Income Increase or (Decrease) Sales $700,000 $      0 ($700,000) Cost of goods sold 380000          0 380000 Gross margin $320,000          0 -320000 Selling and administrative expenses: Selling expenses: Sales salaries 69,000 0 69,000 Direct advertising 52,000 0 52,000 General advertising 10,500 10,500 0 Store rent 86,000 0 86,000 Depreciation of store fixtures 4,700 4,700 0 Delivery salaries 7,100 3,000 4,100 Depreciation of delivery equipment 3100 3100 0 Total selling expenses 232,400 21300 211,100 Administrative expenses: Store management salaries 21,500 11,000 10,500 Salary of new manager 10,000 0 10,000 General office compensation 11,000 5,500 5,500 Insurance on fixtures and 7,800 2,600 5,200 inventory Utilities 32,910 0 32,910 Employment taxes 17,790 2,925 14,865 General office—other 17500 17500             0 Total administrative expenses 118,500 39,525 78,975 Total operating expenses 350,900 60,825 290,075 Net operating income (loss) ($30,900) ($60,825) ($29,925)

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