1 PROBLEM 10-26A Close or Retain a Store [LO10-2 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 East Store North Store South Store Total $3,000,000 $720,000 $1,200,000 $1,080,000 660,000 594,000 Sales. Cost of goods sold Gross margin Selling and administrative expenses 1.657.200 403.200 1,342,800 316,800 540,000 486,000 315,000 383,000 106.000150.900 270.600 Selling expenses Administrative expenses 817,000 231,400 1.200,000 337400465,900396,700 S20,600) 74,100 89.300 Total expenses. Net operating income (loss).... 142,800 The North Store has consistently shown losses over the past two years. For this reason, management is giv. ing 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 is as follows: North South Store East Total Selling expenses: $239,000 $70,000 89,000 $80,000 187,000 51,000 72,000 64,000 45,000 10,800 18,000 16,200 300,00085,000 120,000 95,000 4,600 6,000 5,400 21,0007,000 7,000 7,000 3,000 $817.000 $231,400 $315.000 $270,600 Sales salaries Direct advertising General advertising Store rent Depreciation of store fixtures Delivery salaries Depreciation of dellivery equipment... 16,000 9,000 3,000 3,000 Total selling expenses. Allocated on the basis of sales dollars North Store East South Store Total Administrative expenses: $ 70,000 $21,000 $30,000 $19,000 50,000 12,000 20,000 18,000 7,500 9,0008,500 106,000 31,000 40,000 35,000 57,00016,500 21,90018,600 18,000 30,000 27,000 Store management salaries General office salaries Insurance on fixtures and inventory 25,000 nt taxes.. 75,000 General office-other $383.000 $106,000 $150,900 $126,100 Total administrative expenses Allocated on the basis of sales dollars The lease on the building housing the North Store can be broken with no penalty. 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 $11,000 per quarter. The general manager of the North Store would be retained at her normal salary of $12,000 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 $4,000 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 company's employment taxes are 15% of salaries One-third of the insurance in the North Store is on the store's fixtures. b. c. d. f. h. 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 $6,000 per quarter Required: 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. 2. Assuming that the store space can't be subleased, what recommendation would you make to the management of Superior Markets, Inc.? Disregard requirement 2. Assume that if the North Store were closed, at least one-fourth of its sales would transfer to the East Store, due to strong customer loyalty to Superior Markets. The East Store has enough capacity to handle the increased sales. You may assume that the increased sales in the East Store would yield the same gross margin as a percentage of sales as present sales in that store. What effect would these factors have on your recommendation concerning the North Store? Show all computations to support your answer 3