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 $ 4,700,000 $ 940,000 $ 1,880,000 $ 1,880,000 Cost of goods sold 2,585,000 580,000 971,000 1,034,000 Gross margin 2,115,000 360,000 909,000 846,000 Selling and administrative expenses Selling expenses 851,000 248,400 323,500 279,100 Administrative expenses 468,000 123,000 176,400 168,600 Total expenses 1,319,000 371,400 499,900 447,700 Net operating income (loss) $ 796,000 $ (11,400 ) $ 409,100 $ 398,300 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 $ 252,800 $ 60,600 $ 80,200 $ 112,000 Direct advertising 182,000 68,000 89,000 25,000 General advertising 70,500 14,100 28,200 28,200 Store rent 281,000 86,000 105,000 90,000 Depreciation of store fixtures 24,500 6,300 7,700 10,500 Delivery salaries 26,100 8,700 8,700 8,700 Depreciation of delivery equipment 14,100 4,700 4,700 4,700 Total selling expenses $ 851,000 $ 248,400 $ 323,500 $ 279,100 Allocated on the basis of sales dollars Total North Store South Store East Store Administrative expenses Store managers' salaries $ 95,500 $ 29,500 $ 38,500 $ 27,500 General office salaries 70,500 14,100 28,200 28,200 Insurance on fixtures and inventory 42,000 12,600 17,500 11,900 Utilities 75,765 26,365 21,860 27,540 Employment taxes 66,735 16,935 23,340 26,460 General officeother 117,500 23,500 47,000 47,000 Total administrative expenses $ 468,000 $ 123,000 $ 176,400 $ 168,600 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 $13,100 per quarter The general manager of the North Store would continue to earn her normal salary of $14,100 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 $5,700 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 $7,050 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	$	4,700,000	$	940,000		$	1,880,000	$	1,880,000
Cost of goods sold		2,585,000		580,000			971,000		1,034,000
Gross margin		2,115,000		360,000			909,000		846,000
Selling and administrative expenses:
Selling expenses		851,000		248,400			323,500		279,100
Administrative expenses		468,000		123,000			176,400		168,600
Total expenses		1,319,000		371,400			499,900		447,700
Net operating income (loss)	$	796,000	$	(11,400	)	$	409,100	$	398,300

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	$	252,800	$	60,600	$	80,200	$	112,000
Direct advertising		182,000		68,000		89,000		25,000
General advertising*		70,500		14,100		28,200		28,200
Store rent		281,000		86,000		105,000		90,000
Depreciation of store fixtures		24,500		6,300		7,700		10,500
Delivery salaries		26,100		8,700		8,700		8,700
Depreciation of delivery equipment		14,100		4,700		4,700		4,700
Total selling expenses	$	851,000	$	248,400	$	323,500	$	279,100

*Allocated on the basis of sales dollars.

	Total		North Store		South Store		East Store
Administrative expenses:
Store managers' salaries	$	95,500	$	29,500	$	38,500	$	27,500
General office salaries*		70,500		14,100		28,200		28,200
Insurance on fixtures and inventory		42,000		12,600		17,500		11,900
Utilities		75,765		26,365		21,860		27,540
Employment taxes		66,735		16,935		23,340		26,460
General officeother*		117,500		23,500		47,000		47,000
Total administrative expenses	$	468,000	$	123,000	$	176,400	$	168,600

*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 $13,100 per quarter. The general manager of the North Store would continue to earn her normal salary of $14,100 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 $5,700 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 $7,050 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?