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 $ 4,100,000 $ 860,000 $ 1,640,000 $ 1,600,000 Cost of goods sold 2,255,000 515,000 860,000 880,000 Gross margin 1,845,000 345,000 780,000 720,000 Selling and administrative expenses Selling expenses 839,000 242,400 320,500 276,100 Administrative expenses 438,000 117,000 167,400 153,600 Total expenses 1,277,000 359,400 487,900 429,700 Net operating income (loss) $ 568,000 $ (14,400 ) $ 292,100 $ 290,300 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 $ 263,400 $ 69,600 $ 80,600 $ 113,200 Direct advertising 176,000 62,000 83,000 31,000 General advertising 61,500 12,900 24,600 24,000 Store rent 280,000 80,000 113,000 87,000 Depreciation of store fixtures 21,500 5,700 7,100 8,700 Delivery salaries 24,300 8,100 8,100 8,100 Depreciation of delivery equipment 12,300 4,100 4,100 4,100 Total selling expenses $ 839,000 $ 242,400 $ 320,500 $ 276,100 Allocated on the basis of sales dollars Total North Store South Store East Store Administrative expenses Store managers' salaries $ 86,500 $ 26,500 $ 35,500 $ 24,500 General office salaries 61,500 12,900 24,600 24,000 Insurance on fixtures and inventory 36,000 10,800 14,500 10,700 Utilities 86,145 27,735 29,480 28,930 Employment taxes 65,355 17,565 22,320 25,470 General officeother 102,500 21,500 41,000 40,000 Total administrative expenses $ 438,000 $ 117,000 $ 167,400 $ 153,600 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 $11,900 per quarter The general manager of the North Store would continue to earn her normal salary of $12,900 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 $5,100 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 $6,450 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	$	4,100,000	$	860,000		$	1,640,000	$	1,600,000
Cost of goods sold		2,255,000		515,000			860,000		880,000
Gross margin		1,845,000		345,000			780,000		720,000
Selling and administrative expenses:
Selling expenses		839,000		242,400			320,500		276,100
Administrative expenses		438,000		117,000			167,400		153,600
Total expenses		1,277,000		359,400			487,900		429,700
Net operating income (loss)	$	568,000	$	(14,400	)	$	292,100	$	290,300

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	$	263,400	$	69,600	$	80,600	$	113,200
Direct advertising		176,000		62,000		83,000		31,000
General advertising*		61,500		12,900		24,600		24,000
Store rent		280,000		80,000		113,000		87,000
Depreciation of store fixtures		21,500		5,700		7,100		8,700
Delivery salaries		24,300		8,100		8,100		8,100
Depreciation of delivery equipment		12,300		4,100		4,100		4,100
Total selling expenses	$	839,000	$	242,400	$	320,500	$	276,100

*Allocated on the basis of sales dollars.

	Total		North Store		South Store		East Store
Administrative expenses:
Store managers' salaries	$	86,500	$	26,500	$	35,500	$	24,500
General office salaries*		61,500		12,900		24,600		24,000
Insurance on fixtures and inventory		36,000		10,800		14,500		10,700
Utilities		86,145		27,735		29,480		28,930
Employment taxes		65,355		17,565		22,320		25,470
General officeother*		102,500		21,500		41,000		40,000
Total administrative expenses	$	438,000	$	117,000	$	167,400	$	153,600

*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 $11,900 per quarter. The general manager of the North Store would continue to earn her normal salary of $12,900 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 $5,100 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 $6,450 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?