Superior Markets, Inc., operates three stores in a large metropolitan area. A se
ID: 2484327 • 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 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 $13,400 per quarter. The general manager of the North Store would be retained at her normal salary of $14,400 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 $6,000 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 $7,200 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.)
Income Statement
For the Quarter Ended September 30
Total North
Store South
Store East
Store Sales $ 5,000,000 $ 960,000 $ 2,000,000 $ 2,040,000 Cost of goods sold 2,750,000 600,000 1,028,000 1,122,000 Gross margin 2,250,000 360,000 972,000 918,000 Selling and administrative expenses: Selling expenses: 857,000 251,400 325,000 280,600 Administrative expenses 483,000 126,000 180,900 176,100 Total expenses 1,340,000 377,400 505,900 456,700 Net operating income (loss) $ 910,000 $ (17,400 ) $ 466,100 $ 461,300
Explanation / Answer
Based on your computations in (1) above, what recommendation would you make to the management of Superior Markets, Inc.?
The North Store should not be closed
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.
The North Store should be closed.
Superior Markets, , INC. Schedule Gross margin lost if the store is closed $3,60,000 Less costs which can be avoided: Direct advertising $31,000 Sales salaries 64,400 Delivery salaries 6,000 Store rent 81,000 Store management salaries 13,400 General office salaries 7,200 Utilities 25,280 Insurance on inventories 4,500 Employment taxes* 13,650 2,46,430 Decrease in company net operating income if the Downtown Store is closed $1,13,570 *Salaries avoided by closing store: Sales salaries $64,400 Delivery salaries 6,000 Store management salaries 13,400 General office salaries 7,200 Total salaries 91,000 Employment tax rate 15% Employment taxes avoided $13,650Related Questions
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