Superior Markets, Inc., operates three stores in a large metropolitan area. A se
ID: 2572323 • 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 $11,600 per quarter. The general manager of the North Store would be retained at her normal salary of $12,600 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 $5,000 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 $6,300 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.
Calculate the net advantage of closing the North Store
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
Solution:
1. The simplest approach to the solution is:
Gross margin lost if the store is closed........
$(345,000)
Costs that can be avoided:
Sales salaries........................................
$55,200
Direct advertising..................................
61,000
Store rent.............................................
95,000
Delivery salaries....................................
3,000
Store management salaries
($26,000 – $12,600)............................
13,400
Salary of new manager..........................
11,600
General office compensation...................
6,300
Insurance on inventories ($10,500 × 2/3)
7,000
Utilities.................................................
30,630
Employment taxes.................................
13,725
*
296,855
Decrease in company profits if the North Store is closed......................................
$ (48,145)
*Salaries avoided by closing the store:
Sales salaries.......................................
$55,200
Delivery salaries...................................
5,000
Store management salaries...................
13,400
Salary of new manager.........................
11,600
General office compensation..................
6,300
Total avoided..........................................
91,500
Employment tax rate...............................
×15%
Employment taxes avoided......................
$13,725
2.
Gross margin lost if the North Store is closed (part 1)..
$(345,000)
Gross margin gained from the East Store: $840,000 × 1/4 = $210,000; $210,000 × 45%* = $81,000..........
94,500
Net operating loss in gross margin............................
(250,500)
Less costs that can be avoided if the North Store is closed (part 1)......................................................
296,855
Net advantage of closing the North Store...................
$ 46,355
*The East Store’s gross margin percentage is:
$702,000 ÷ $1,560,000 = 45%
Gross margin lost if the store is closed........
$(345,000)
Costs that can be avoided:
Sales salaries........................................
$55,200
Direct advertising..................................
61,000
Store rent.............................................
95,000
Delivery salaries....................................
3,000
Store management salaries
($26,000 – $12,600)............................
13,400
Salary of new manager..........................
11,600
General office compensation...................
6,300
Insurance on inventories ($10,500 × 2/3)
7,000
Utilities.................................................
30,630
Employment taxes.................................
13,725
*
296,855
Decrease in company profits if the North Store is closed......................................
$ (48,145)
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