Problem 11 26 Close or Retain a Store LO11 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 Total North Store South Store East Store Sales $ 4,200,000 $ 840,000 $ 1,680,000 $ 1,680,000 Cost of goods sold 2,310,000 500,000 886,000 924,000 Gross margin 1,890,000 340,000 794,000 756,000 Selling and administrative expenses Selling expenses 841,000 243,400 321,000 276,600 Administrative expenses 443,000 118,000 168,900 156,100 Total expenses 1,284,000 361,400 489,900 432,700 Net operating income (loss) $ 606,000 $ (21,400 ) $ 304,100 $ 323,300 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 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 $ 256,800 $ 68,600 $ 78,200 $ 110,000 Direct advertising 177,000 63,000 84,000 30,000 General advertising 63,000 12,600 25,200 25,200 Store rent 285,000 81,000 114,000 90,000 Depreciation of store fixtures 22,000 5,800 7,200 9,000 Delivery salaries 24,600 8,200 8,200 8,200 Depreciation of delivery equipment 12,600 4,200 4,200 4,200 Total selling expenses $ 841,000 $ 243,400 $ 321,000 $ 276,600 Allocated on the basis of sales dollars Total North Store South Store East Store Administrative expenses Store managers' salaries $ 88,000 $ 27,000 $ 36,000 $ 25,000 General office salaries 63,000 12,600 25,200 25,200 Insurance on fixtures and inventory 37,000 11,100 15,000 10,900 Utilities 85,140 28,840 28,560 27,740 Employment taxes 64,860 17,460 22,140 25,260 General officeother 105,000 21,000 42,000 42,000 Total administrative expenses $ 443,000 $ 118,000 $ 168,900 $ 156,100 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 $11,600 per quarter The general manager of the North Store would continue to earn her normal salary of $12,600 per quarter All other managers and 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 were closed This persons salary is $5,200 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 pays employment taxes equal to 15 of their employees' salaries One third of the insurance in the North Store is on the stores 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 persons compensation is $6,300 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

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Problem 11-26 Close or Retain a Store [LO11-2] Superior Markets, Inc., operates three stores in a large metropolitan area. A segmented absorption costing income statement

Problem 11-26 Close or Retain a Store [LO11-2]

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
	Total		North Store			South Store		East Store
Sales	$	4,200,000	$	840,000		$	1,680,000	$	1,680,000
Cost of goods sold		2,310,000		500,000			886,000		924,000
Gross margin		1,890,000		340,000			794,000		756,000
Selling and administrative expenses:
Selling expenses		841,000		243,400			321,000		276,600
Administrative expenses		443,000		118,000			168,900		156,100
Total expenses		1,284,000		361,400			489,900		432,700
Net operating income (loss)	$	606,000	$	(21,400	)	$	304,100	$	323,300

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:

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	$	256,800	$	68,600	$	78,200	$	110,000
Direct advertising		177,000		63,000		84,000		30,000
General advertising*		63,000		12,600		25,200		25,200
Store rent		285,000		81,000		114,000		90,000
Depreciation of store fixtures		22,000		5,800		7,200		9,000
Delivery salaries		24,600		8,200		8,200		8,200
Depreciation of delivery equipment		12,600		4,200		4,200		4,200
Total selling expenses	$	841,000	$	243,400	$	321,000	$	276,600

*Allocated on the basis of sales dollars.

	Total		North Store		South Store		East Store
Administrative expenses:
Store managers' salaries	$	88,000	$	27,000	$	36,000	$	25,000
General office salaries*		63,000		12,600		25,200		25,200
Insurance on fixtures and inventory		37,000		11,100		15,000		10,900
Utilities		85,140		28,840		28,560		27,740
Employment taxes		64,860		17,460		22,140		25,260
General officeother*		105,000		21,000		42,000		42,000
Total administrative expenses	$	443,000	$	118,000	$	168,900	$	156,100

*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 $11,600 per quarter. The general manager of the North Store would continue to earn her normal salary of $12,600 per quarter. All other managers and 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 were closed. This persons salary is $5,200 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 pays employment taxes equal to 15% of their employees' salaries.
One-third of the insurance in the North Store is on the stores 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 persons compensation is $6,300 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?