Superior Markets, Inc., operates three stores in a large metropolitan area. A se
ID: 2438390 • Letter: S
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 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 $10,000 per quarter. The general manager of the North Store would continue to earn her normal salary of $11,000 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 $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 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 $5,500 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 $ 3,100,000 $ 700,000 $ 1,240,000 $ 1,160,000 Cost of goods sold 1,705,000 380,000 687,000 638,000 Gross margin 1,395,000 320,000 553,000 522,000 Selling and administrative expenses: Selling expenses 819,000 232,400 315,500 271,100 Administrative expenses 388,000 107,000 152,400 128,600 Total expenses 1,207,000 339,400 467,900 399,700 Net operating income (loss) $ 188,000 $ (19,400 ) $ 85,100 $ 122,300
Explanation / Answer
Answer 1: Employee salaries the company will avoid if it closes the North Store
Working:
Salaries being paid currently Sales Salaries $69,000.00
Delivery salaries $7,100.00
Store managers' salaries $21,500.00
General office salaries $11,000.00 $108,600.00
(Less: Salaries if North
Store Closes) Sales Salaries (Note:1) $0.00
Delivery salaries (Note:2) $3,000.00
Store managers' salaries (Note: 3) $11,000.00
General office salaries (Note:4) $5,500.00 $(19,500.00)
Total Savings from Salaries $89,100.00
Notes:
1 All sales employees will be discharged if the north store closes.
2 One person from delivery crew is discharged whose salary is $4,100. Hence, salary being paid after store closes is $7,100-$4,100=$3,000.
3 Except for the general manager of the store all other employees are being discharged. Hence, only $11,000 will paid against Store manager's salaries.
4 One person in the general office could be discharged whose compensation is $5,500 per quarter. Hence, salary being paid after north store closes is $11,000-$5,500=$5,500.
Answer 2: Employment taxes the company will avoid if it closes the North Store
Employment Taxes currently being paid ($108,600*15%) $16,290
Less: Employment Taxes after North Store Closes ($19,500*15%) $2,925
Total Savings on Employment Taxes $13,365
Answer 3:
Assuming all else remains the same, the advantages & disadvantages of closing the North Store have been highlighted below with all calculations.
Advantages
Disadvantages
Working:
Before North Store Closes After North Store Closes
Sales 3,100,000 2,400,000
Cost of goods sold 1,705,000 1,325,000
Gross margin 1,395,000 1,075,000
Selling and administrative
expenses:
Selling expenses 819,000 607,900
Administrative expenses 388,000 330,965
Total expenses 1,207,000 938,865
Net operating income (loss) 188,000 136,135
Before North Store Closes After North Store Closes
Selling expenses:
Sales salaries 240,400 171,400
Direct advertising 180,000 128,000
General advertising* 46,500 46,500
Store rent 305,000 219,000
Depreciation of store fixtures 16,500 16,500
Delivery salaries 21,300 17,200
Depreciation of
delivery equipment 9,300 9,300
Total selling expenses 819,000 607,900
Before North Store Closes After North Store Closes
Administrative expenses:
Store managers' salaries 71,500 61,000
General office salaries* 46,500 41,000
Insurance on fixtures
and inventory 26,000 20,800
Utilities 109,545 76,635
Employment taxes 56,955 54,030
General office—other* 77,500 77,500
Total administrative expenses 388,000 330,965
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