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:

a. The breakdown of the selling and administrative expenses is as follows:

*Allocated on the basis of sales dollars.

*Allocated on the basis of sales dollars.

b. The lease on the building housing the North Store can be broken with no penalty.

c. The fixtures being used in the North Store would be transferred to the other two stores if the North Store were closed.

d. 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 $11,000 per quarter. The general manager of the North Store would be retained at her normal salary of $12,000 per quarter. All other employees in the store would be discharged.

e. 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 $4,000 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.

f. The company’s employment taxes are 15% of salaries.

g. One-third of the insurance in the North Store is on the store’s fixtures.

h. 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 $6,000 per quarter.

Required:

1. 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.)

2. Based on your computations in (1) above, what recommendation would you make to the management of Superior Markets, Inc.?

3. 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.

a. Calculate the net advantage of closing the North Store. (Any losses should be indicated by a minus sign.)

b. What recommendation would you make to the management of Superior Markets, Inc.?

Superior Markets, Inc.
Income Statement
For the Quarter Ended September 30
Total North
Store South
Store East
Store Sales $ 3,000,000 $ 720,000 $ 1,200,000 $ 1,080,000 Cost of goods sold 1,657,200 403,200 660,000 594,000 Gross margin 1,342,800 316,800 540,000 486,000 Selling and administrative expenses: Selling expenses: 817,000 231,400 315,000 270,600 Administrative expenses 383,000 106,000 150,900 126,100 Total expenses 1,200,000 337,400 465,900 396,700 Net operating income (loss) $ 142,800 $ (20,600 ) $ 74,100 $ 89,300

Explanation / Answer

1 Gross margin lost if north store is closed -316800 Savings in cost: Store rent 85000 Sales salaries 70000 Direct adveritising 51000 Delivery salaries 4000 Store management salaries (21000-12000) 9000 Salary of new manager 11000 General office compensation 6000 Insurance (7500*2/3) 5000 Utilities 31000 Employment taxes (Note:1) 15000 287000 Decrease in net profit if North store is closed -29800 Note:1 -Computation of employment taxes:- Salaries which can be avoided, Sales salaries 70000 Delivery salaries 4000 Store management salaries 9000 Salary of new manager 11000 General office compensation 6000 Total 100000 Employment tax rate * 15% Employment tax avoidable 15000 2 The North Store should not be closed (Since there is a decrease in overall net profit by $29800) 3-a. Gross margin lost if north store is closed -316800 Gross margin earned from East store (Note:2) 81000 Net gross margin lost -235800 Savings in cost 287000 Net advantage of closing north store 51200 3-b. The North Store should be closed (Since there is an increase in overall net profit by $51200) Note:2 -Gross margin earned from East store Gross margin % of east store=Gross margin/Sales=486000/1080000=0.45=45% Sales transferred from North to East store=1/4 th of sales=720000*1/4=$ 180000 Gross margin earned from sales transferred=180000*45%=$ 81000

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