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 Store Total Sales Cost of goods sold Gross margin Selling and administrative expenses: $3,700,000 $800,000 $1,480,000 $1,420,000 781,000 639,000 2,035,000 460,000 1,665, 000 340,000 794,000 686,000 Selling expenses Administrative 418,000 113,000 274,100 143,600 417,700 $ 416,000 $(11,400)$ 206,100 $ 221,300 318,500 161,400 479,900 831,000 238,400 expenses Total expenses ,249,000 351,400 Net operating income (loss) 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 a. The breakdown of the selling and administrative expenses that are shown above is as follows North Store South Store East Store Total Selling expenses: $214,800 $ 59,700 $ 72,200 $ 82,900 Direct advertising 172,000 58,000 79,000 35,000 55,500 12,000 22,200 21,300 335,000 92,000 127,000 116,000 7,500 7,700 Sales salaries General advertising* Store rent Depreciation of 19,500 Delivery salaries 23,100 11,100 5,300 7,700 3,700 6,700 7,700 3,700 store fixtures Depreciation of 3,700 delivery equipment Total selling $831,000 $238,400 $318,500 $274,100 expenses Allocated on the basis of sales dollars.

Explanation / Answer

1). Employee salaries will company avoid if closes north store.
Sales salaries                      59700
Delivery Salaries                   4700
Store manager Salaries        12500 (24500-12000)
General office salaries          6000
Salary of New manager        11000
Total                                   93900

2). Employment taxes the company will avoid are:
= 93900*15% = 14085

3). Calculation of Advantage or disadvantage.
Employee salaries           93900
Employment taxes          14085
Rent                               92000
Insurance                        6400    (9600/3*2)
Direct advertising             58000
Utilities                           31315
Total Exp avoided            295700
Reduction in Gross Margin is $340000
Net Disadvantage = 340000-295700 = $44300
(Here no explanation is given on Direct advertising and utiliities and are looking to be directly attributable so deemed as avoidable)

4). Even if the space of North store can be subleased it is not advisable to close the store because there is disadvantage even when the lease can be broken without any penalty.

5). If 1/4 of sales of north store is tfd to east store.
Gross margin of 1/4 sales = 340000/4 = $85000
Current disadvantage for closing the store = $ 44300
Net advantage = 85000- 44300= $40700
Hence the north store in this situation should be closed.

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