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 $ 4,000,000 $ 840,000 $ 1,600,000 $ 1,560,000 Cost of goods sold 2,200,000 495,000 847,000 858,000 Gross margin 1,800,000 345,000 753,000 702,000 Selling and administrative expenses Selling expenses 837,000 241,400 320,000 275,600 Administrative expenses 433,000 116,000 165,900 151,100 Total expenses 1,270,000 357,400 485,900 426,700 Net operating income (loss) $ 530,000 $ (12,400 ) $ 267,100 $ 275,300 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 $ 235,000 $ 55,200 $ 83,000 $ 96,800 Direct advertising 175,000 61,000 82,000 32,000 General advertising 60,000 12,600 24,000 23,400 Store rent 310,000 95,000 112,000 103,000 Depreciation of store fixtures 21,000 5,600 7,000 8,400 Delivery salaries 24,000 8,000 8,000 8,000 Depreciation of delivery equipment 12,000 4,000 4,000 4,000 Total selling expenses $ 837,000 $ 241,400 $ 320,000 $ 275,600 Allocated on the basis of sales dollars Total North Store South Store East Store Administrative expenses Store managers' salaries $ 85,000 $ 26,000 $ 35,000 $ 24,000 General office salaries 60,000 12,600 24,000 23,400 Insurance on fixtures and inventory 35,000 10,500 14,000 10,500 Utilities 92,400 30,630 30,400 31,370 Employment taxes 60,600 15,270 22,500 22,830 General officeother 100,000 21,000 40,000 39,000 Total administrative expenses $ 433,000 $ 116,000 $ 165,900 $ 151,100 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 $5,000 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 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 1 Employee salaries 2 Employment taxes 3 Financial advantage (disadvantage) 4 should not be closed X 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 (Enter any disadvantages as a negative value ) Show less Financial advantage (disadvantage)

The Answer is in the image, click to view ...

Answered step by step

Verified Expert Solution

Link Copied!

Question

1 Approved Answer

Posted on Jul 27, 2024

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	$	4,000,000	$	840,000		$	1,600,000	$	1,560,000
Cost of goods sold		2,200,000		495,000			847,000		858,000
Gross margin		1,800,000		345,000			753,000		702,000
Selling and administrative expenses:
Selling expenses		837,000		241,400			320,000		275,600
Administrative expenses		433,000		116,000			165,900		151,100
Total expenses		1,270,000		357,400			485,900		426,700
Net operating income (loss)	$	530,000	$	(12,400	)	$	267,100	$	275,300

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	$	235,000	$	55,200	$	83,000	$	96,800
Direct advertising		175,000		61,000		82,000		32,000
General advertising*		60,000		12,600		24,000		23,400
Store rent		310,000		95,000		112,000		103,000
Depreciation of store fixtures		21,000		5,600		7,000		8,400
Delivery salaries		24,000		8,000		8,000		8,000
Depreciation of delivery equipment		12,000		4,000		4,000		4,000
Total selling expenses	$	837,000	$	241,400	$	320,000	$	275,600

*Allocated on the basis of sales dollars.

	Total		North Store		South Store		East Store
Administrative expenses:
Store managers' salaries	$	85,000	$	26,000	$	35,000	$	24,000
General office salaries*		60,000		12,600		24,000		23,400
Insurance on fixtures and inventory		35,000		10,500		14,000		10,500
Utilities		92,400		30,630		30,400		31,370
Employment taxes		60,600		15,270		22,500		22,830
General officeother*		100,000		21,000		40,000		39,000
Total administrative expenses	$	433,000	$	116,000	$	165,900	$	151,100

*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 $5,000 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 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?


1	Employee salaries
2	Employment taxes
3	Financial advantage (disadvantage)
4	should not be closed	X
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? (Enter any "disadvantages" as a negative value.) Show less Financial advantage (disadvantage)