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PROBLEM 12-26 Close or Retain a Store [L012-2] 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 Sales Cost of goods sold Gross margin Selling and administrative expenses: Selling expenses Administrative expenses Total expenses . Net operating income (loss) . Total 817,000 383,000 $ 142,800 North Store $720,000 403,200 316,800 231 ,400 106,000 337,400 $ (20,600) South Store 660,000 540,000 315,000 150,900 465,900 $ 74,100 East Store 594,000 486,000 270,600 126,100 396,700 $ 89,300 The North Store has consistently shown losses over the past two years. For this reason, manage- ment is giving consideration to closing the store. The company has asked you to make a rec- ommendation 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: Selling expenses: Sales salaries Direct advertising . General advertising* Store rent Depreciation of store fixtures . Delivery salaries . Depreciation of delivery equipment Total selling expenses . Allocated on the basis of sales dollars. Administrative expenses: Store management salaries ........... General Office salaries* . Insurance on fixtures and inventory . Utilities . Employment taxes . General officeother' Total administrative expenses . Allocated on the basis of sales dollars. Total $239,000 187,000 45,000 300,000 16,000 21 ,ooo 9,000 $817,000 Total $ 70,000 50,000 25,000 106,000 57,000 75,000 $383,000 North Store $ 70,000 51 ,ooo 10,800 85,000 4,600 7 ,ooo 3,000 $231 ,400 North Store $ 21,000 12,000 7,500 31 ,ooo 16,500 18,000 $106,000 South Store $ 89,000 72,000 18,000 120,000 6,000 7,000 3,000 $315,000 South Store $ 30,000 20,000 9,000 40,000 21 ,900 30,000 $150,900 Store $ 80,000 64,000 16,200 95,000 5,400 7,000 3,000 $270,600 East Store $ 19,000 18,000 8,500 35,000 18,600 27,000 $126,100 b. c. d. e. f. g. h. 2. 3. 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 Sl I ,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. 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 person's compensation is $6,000 per quarter. Prepare a schedule showing the change in revenues and expenses and the impact on the com- pany's overall net operating income that would result if the North Store were closed. 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 Emst 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.