12-3 Superior Markets, Inc., operates three stores in a large metropolitan area.
ID: 2458714 • Letter: 1
Question
12-3
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 $10,400 per quarter. The general manager of the North Store would be retained at her normal salary of $11,400 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 $4,300 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 $5,700 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
Please take note of the following :
1. Expenditures of general Advertising and General Office and others are of nature of Fixed costs. These are apportioned on the basis of Sales Volume. However, when the North Store is closed, there would be saving of $5,700. Which is being reduced from the General and other expenses. They have been apportioned on the same basis as earlier on the basis of sales volume .
2. Expenditure of delivery services are of constant nature and earlier has been distributed equally amongst the three stores. However, on North store being closed, the total expenditure of $ 21900( $ 7300 +$ 7300+$ 7300) would be reduced by $ 4300 and resultant expenditure would be distributed equally between two stores.
3. 1/3rd of the amount of insurance relates to fixures of North stores, the same is carried to next period and apportioned to the two stores.Other insurance expenditures are irrelevant and have been avoided.
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Based on computations in (1) above, the recommendation is that North Store should not be closed because it has resulted in the Net Income being reduced from $ 264,000 to $ 226,990. The reason being most of the company's fixed cost are constant.
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Note : We are assuming here that there would be no change in the fixed cost element and it will be remain the same as it was earlier when North store was closed and no sales was transfered to any store. Still the gross profit is less then what is was when North store was operating.
Hence it is recommended that North Store should not be closed at all. The Net profit is still lesser by $ 29,641. Therefore North store should not be closed
Schedule of change in revenue, if North Stores Is closed Superior Markets, Inc. Income Statement For the Quarter Total South East Store Store Sales $ 25,40,000 $ 13,20,000 $ 12,20,000 Cost of goods sold 13,82,000 7,11,000 6,71,000 Gross margin 11,58,000 6,09,000 5,49,000 Selling and administrative expenses: Selling expenses: 6,11,200 328025 2,83,175 Administrative expenses 3,19,810 1,70,977 1,48,833 Total expenses 9,31,010 4,99,002 4,32,008 Net operating income (loss) $ 2,26,990 $ 1,09,998 $ 1,16,992Related Questions
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