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: $4,600,000 $920,000 1,840,000 $1, 840,000 1,012,000 828,000 2,530,000 2,070,000 565,000 355, 000 953,000 887,000 323,000 174,900 497,900 (14,400) 389,100 383,300 278,600 166,100 444,700 Selling expenses Administrative expenses 463,000 1,312,000 $ 758,000 849,000 247,400 122,000 369,400 Total expenses 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

Explanation / Answer

1 Avoidable employee salaries: Savings due to general manager's transfer 12800 Delivery salaries 5600 General office salaries 6900 Sales salaries 62200 Store manager's salaries 29000 Total 116500 2 Avoidable employement taxes=15% of avoidable employee salaries=116500*15%=17475 3 Financial advantage/(Disadvantage) of closing north store: Savings: Direct advertising 67000 Store rent 85000 Insurance on inventory (12300*2/3) 8200 Utilities 26860 Employee salaries (Refer: 1) 116500 Employement tax (Refer: 2) 17475 321035 Less: Gross margin lost 355000 Financial disadvantage -33965 4 No.If north store floor space cant be subleased, then savings will reduce since store rent is not an avoidable cost. 5 Financial advantage/(Disadvantage) of closing north store: Savings: Increased gross margin (Note:1) 103500 Direct advertising 67000 Store rent 85000 Insurance on inventory (12300*2/3) 8200 Utilities 26860 Employee salaries (Refer: 1) 116500 Employement tax (Refer: 2) 17475 424535 Less: Gross margin lost 355000 Financial advantage 69535 Notes: 1. Sale of north store which can be transferred=920000*1/4=230000 Gross margin % of east store=828000/1840000=45% Increased gross margin=230000*45%=103500

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