Superior Markets, Inc., operates three stores in a large metropolitan area. A se
ID: 2455524 • 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 is as follows:
*Allocated on the basis of sales dollars.
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 $21,000 per quarter. The general manager of the North Store would be retained at her normal salary of $22,000 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 $23,000 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.
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 $11,000 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.)
Superior Markets, Inc.Income Statement
For the Quarter Ended September 30
Total North
Store South
Store East
Store Sales $ 4,140,000 $ 1,100,000 $ 1,580,000 $ 1,460,000 Cost of goods sold 2,288,000 616,000 869,000 803,000 Gross margin 1,852,000 484,000 711,000 657,000 Selling and administrative expenses: Selling expenses: 1,179,900 353,000 434,700 392,200 Administrative expenses 622,120 182,100 232,640 207,380 Total expenses 1,802,020 535,100 667,340 599,580 Net operating income (loss) $ 49,980 $ (51,100 ) $ 43,660 $ 57,420
Explanation / Answer
Selling Expenses Total Cost assigned to North store Not Avoidable Avoidable Sales salaries 108000 108000 Direct advertising 70000 70000 General advertising* 16500 16500 Store rent 104000 104000 Depreciation of store fixtures 16000 16000 Delivery salaries 26000 3000 23000 Depreciation of delivery equipment 12500 12500 Total Selling expense 353000 48000 305000 Administrative expenses: Store management salaries 40000 22000 18000 General office salaries* 22000 11000 11000 Insurance on fixtures and inventory 13200 4400 8800 Utilities 50000 50000 Employment taxes 29400 25050 4350 General office —other* 27500 27500 Total administrative expenses 182100 139950 42150 Change in Revenues & Expenses Dropping Northstore NET Total North store Sales 41,40,000 -1100000 30,40,000 Cost of goods sold 22,88,000 616000 16,72,000 Gross margin 18,52,000 -484000 13,68,000 Selling and administrative expenses: Selling expenses: 11,79,900 305000 8,74,900 Administrative expenses 6,22,120 42150 5,79,970 Total expenses 18,02,020 3,47,150 14,54,870 Net operating income (loss) 49,980 -1,36,850 -86,870 Changes in Net Income if North Store is dropped Contribution Loss 484000 Less:Avoidable Selling expenses 305000 Avoidable Admn. expenses 42150 Decrease in overall NOI -136850 Resultant NOI( +49980- 136850) -86,870 Hence, the North Store should be kept open.
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