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, Inc Income Statement For the Quarter Ended September 30 North Store South Store East Total Sales Cost of goods sold Store $4,800,000 $960,000 $1,920,000 $1,920,000 1,056,000 2,640,000 600,000 984,000 Gross margin 2,160,000 360,000 936,000 864,000 Selling and administrative expenses Selling expenses: Administrative expenses 853,000 473,000 249,400 124,000 324,000 177,900 279,600 171,100 lotal expenses 1,326,000373,400 501,900 450,700 Net operating income (loss) $ 834,000 $ (13,400) $ 434,100 $ 413,300 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

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

Data for quarter ended 30th september.

Store management salary (Relevant gain)

($30000 - $14400)

Working 2 - Employment taxes avoided

Part 1 - Financial advantage/Disadvantage of shutting down North store

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

Part 2 - As per analysis, North store should not be closed. If store is closed then income of company as a whole would be reduced by $53380

Part 3 (a) = Advantage/Disadvantage of closing north store if north store can't be subleased.

Less : Gross margin gain from east store

($960000 * 1/4) * (1056000/1920000 *100)

Less : Costs avoided on closing north stors

($360000 - $53380)

Part 3 (b) - Should be closed

Particulars Amount Sales salary (Relevant gain) $59000 Delivery salary (Relevant gain) $5800

Store management salary (Relevant gain)

($30000 - $14400)

$15600 Salary of new Manager (Relevant gain) $13400 General Officer compensation (relevant gain) $7200 Total salary avoided $101000

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