50.1K

Verified Solution

Link Copied!

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
	Total			North Store			South Store			East Store
Sales	$	3,540,000		$	849,600		$	1,416,000		$	1,274,400
Cost of goods sold		1,955,496			475,776			778,800			700,920
Gross margin		1,584,504			373,824			637,200			573,480
Selling and administrative expenses:
Selling expenses		964,060			273,052			371,700			319,308
Administrative expenses		451,940			125,080			178,062			148,798
Total expenses		1,416,000			398,132			549,762			468,106
Net operating income (loss)	$	168,504		$	(24,308	)	$	87,438		$	105,374

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:

1. The breakdown of the selling and administrative expenses that are shown above is as follows:

	Total		North Store		South Store		East Store
Selling expenses:
Sales salaries	$	282,020	$	82,600	$	105,020	$	94,400
Direct advertising		220,660		60,180		84,960		75,520
General advertising*		53,100		12,744		21,240		19,116
Store rent		354,000		100,300		141,600		112,100
Depreciation of store fixtures		18,880		5,428		7,080		6,372
Delivery salaries		24,780		8,260		8,260		8,260
Depreciation of delivery equipment		10,620		3,540		3,540		3,540
Total selling expenses	$	964,060	$	273,052	$	371,700	$	319,308

*Allocated on the basis of sales dollars.

	Total		North Store		South Store		East Store
Administrative expenses:
Store managers' salaries	$	82,600	$	24,780	$	35,400	$	22,420
General office salaries*		59,000		14,160		23,600		21,240
Insurance on fixtures and inventory		29,500		8,850		10,620		10,030
Utilities		125,080		36,580		47,200		41,300
Employment taxes		67,260		19,470		25,842		21,948
General officeother*		88,500		21,240		35,400		31,860
Total administrative expenses	$	451,940	$	125,080	$	178,062	$	148,798

*Allocated on the basis of sales dollars.

1. The lease on the building housing the North Store can be broken with no penalty.

2. The fixtures being used in the North Store would be transferred to the other two stores if the North Store were closed.

3. 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 $12,980 per quarter. The general manager of the North Store would continue to earn her normal salary of $14,160 per quarter. All other managers and employees in the North store would be discharged.

4. The company has one delivery crew that serves all three stores. One delivery person could be discharged if the North Store were closed. This persons salary is $4,720 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.

5. The company pays employment taxes equal to 15% of their employees' salaries.

6. One-third of the insurance in the North Store is on the stores fixtures.

7. The General office salaries and General officeother 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 persons compensation is $7,080 per quarter.

Required:

1. How much employee salaries will the company avoid if it closes the North Store?

2. How much employment taxes will the company avoid if it closes the North Store?

3. What is the financial advantage (disadvantage) of closing the North Store?

4. Assuming that the North Store's floor space cant be subleased, would you recommend closing the North Store?

5. Assume that the North Store's floor space cant be subleased. However, let's introduce three more assumptions. First, assume that if the North Store were closed, one-fourth of its sales would transfer to the East Store, due to strong customer loyalty to Superior Markets. Second, assume that the East Store has enough capacity to handle the increased sales that would arise from closing the North Store. Third, assume that the increased sales in the East Store would yield the same gross margin as a percentage of sales as present sales in the East store. Given these new assumptions, what is the financial advantage (disadvantage) of closing the North Store?

Answer & Explanation Solved by verified expert

See Answer