Superior Markets, Inc., operates three stores in a largemetropolitan area. A segmented absorption costing income statementfor the company for the last quarter is given below:
Superior Markets, Inc.
Income Statement
For the Quarter Ended September 30 |
| Total | North
Store | South
Store | East
Store |
| Sales | $ | 3,500,000 | | $ | 780,000 | | $ | 1,400,000 | | $ | 1,320,000 | |
| Cost of goods sold | | 1,925,000 | | | 450,000 | | | 749,000 | | | 726,000 | |
| Gross margin | | 1,575,000 | | | 330,000 | | | 651,000 | | | 594,000 | |
| Selling and administrative expenses: | | | | | | | | | | | | |
| Selling expenses | | 827,000 | | | 236,400 | | | 317,500 | | | 273,100 | |
| Administrative expenses | | 408,000 | | | 111,000 | | | 158,400 | | | 138,600 | |
| Total expenses | | 1,235,000 | | | 347,400 | | | 475,900 | | | 411,700 | |
| Net operating income (loss) | $ | 340,000 | | $ | (17,400 | ) | $ | 175,100 | | $ | 182,300 | |
|
The North Store has consistently shown losses over the past twoyears. For this reason, management is giving consideration toclosing the store. The company has asked you to make arecommendation as to whether the store should be closed or keptopen. The following additional information is available for youruse:
The breakdown of the selling and administrative expenses thatare shown above is as follows:
| Total | North
Store | South
Store | East
Store |
| Selling expenses: | | | | | | | | |
| Sales salaries | $ | 228,000 | $ | 62,600 | $ | 77,000 | $ | 88,400 |
| Direct advertising | | 170,000 | | 56,000 | | 77,000 | | 37,000 |
| General advertising* | | 52,500 | | 11,700 | | 21,000 | | 19,800 |
| Store rent | | 325,000 | | 90,000 | | 125,000 | | 110,000 |
| Depreciation of store fixtures | | 18,500 | | 5,100 | | 6,500 | | 6,900 |
| Delivery salaries | | 22,500 | | 7,500 | | 7,500 | | 7,500 |
Depreciation of delivery
equipment | | 10,500 | | 3,500 | | 3,500 | | 3,500 |
| Total selling expenses | $ | 827,000 | $ | 236,400 | $ | 317,500 | $ | 273,100 |
|
*Allocated on the basis of sales dollars.
| Total | North
Store | South
Store | East
Store |
| Administrative expenses: | | | | | | | | |
| Store managers' salaries | $ | 77,500 | $ | 23,500 | $ | 32,500 | $ | 21,500 |
| General office salaries* | | 52,500 | | 11,800 | | 21,000 | | 19,700 |
| Insurance on fixtures and inventory | | 30,000 | | 9,000 | | 11,500 | | 9,500 |
| Utilities | | 103,425 | | 31,390 | | 37,700 | | 34,335 |
| Employment taxes | | 57,075 | | 15,810 | | 20,700 | | 20,565 |
| General office—other* | | 87,500 | | 19,500 | | 35,000 | | 33,000 |
| Total administrative expenses | $ | 408,000 | $ | 111,000 | $ | 158,400 | $ | 138,600 |
|
*Allocated on the basis of sales dollars.
The lease on the building housing the North Store can be brokenwith no penalty.
The fixtures being used in the North Store would be transferredto the other two stores if the North Store were closed.
The general manager of the North Store would be retained andtransferred to another position in the company if the North Storewere closed. She would be filling a position that would otherwisebe filled by hiring a new employee at a salary of $10,800 perquarter. The general manager of the North Store would continue toearn her normal salary of $11,800 per quarter. All other managersand employees in the North 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 wereclosed. This person’s salary is $4,500 per quarter. The deliveryequipment would be distributed to the other stores. The equipmentdoes not wear out through use, but does eventually becomeobsolete.
The company pays employment taxes equal to 15% of theiremployees' salaries.
One-third of the insurance in the North Store is on the store’sfixtures.
The “General office salaries” and “General office—other” relateto the overall management of Superior Markets, Inc. If the NorthStore were closed, one person in the general office could bedischarged because of the decrease in overall workload. Thisperson’s compensation is $5,900 per quarter.
Required:
1. How much employee salaries will the company avoid if itcloses the North Store?
2. How much employment taxes will the company avoid if it closesthe North Store?
3. What is the financial advantage (disadvantage) of closing theNorth Store?
4. Assuming that the North Store's floor space can’t besubleased, would you recommend closing the North Store?
5. Assume that the North Store's floor space can’t be subleased.However, let's introduce three more assumptions. First, assume thatif the North Store were closed, one-fourth of its sales wouldtransfer to the East Store, due to strong customer loyalty toSuperior Markets. Second, assume that the East Store has enoughcapacity to handle the increased sales that would arise fromclosing the North Store. Third, assume that the increased sales inthe East Store would yield the same gross margin as a percentage ofsales as present sales in the East store. Given these newassumptions, what is the financial advantage (disadvantage) ofclosing the North Store?
