Problem 12 26 Close or Retain a Store LO12 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 $ 5,000,000 $ 960,000 $ 2,000,000 $ 2,040,000 Cost of goods sold 2,750,000 600,000 1,028,000 1,122,000 Gross margin 2,250,000 360,000 972,000 918,000 Selling and administrative expenses Selling expenses 857,000 251,400 325,000 280,600 Administrative expenses 483,000 126,000 180,900 176,100 Total expenses 1,340,000 377,400 505,900 456,700 Net operating income (loss) $ 910,000 $ (17,400 ) $ 466,100 $ 461,300 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 $ 246,000 $ 64,400 $ 73,000 $ 108,600 Direct advertising 185,000 71,000 92,000 22,000 General advertising 75,000 14,400 30,000 30,600 Store rent 283,000 81,000 108,000 94,000 Depreciation of store fixtures 26,000 6,600 8,000 11,400 Delivery salaries 27,000 9,000 9,000 9,000 Depreciation of delivery equipment 15,000 5,000 5,000 5,000 Total selling expenses $ 857,000 $ 251,400 $ 325,000 $ 280,600 Allocated on the basis of sales dollars Total North Store South Store East Store Administrative expenses Store managers' salaries $ 100,000 $ 31,000 $ 40,000 $ 29,000 General office salaries 75,000 14,400 30,000 30,600 Insurance on fixtures and inventory 45,000 13,500 19,000 12,500 Utilities 70,800 25,280 19,100 26,420 Employment taxes 67,200 17,820 22,800 26,580 General officeother 125,000 24,000 50,000 51,000 Total administrative expenses $ 483,000 $ 126,000 $ 180,900 $ 176,100 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 $13,400 per quarter The general manager of the North Store would continue to earn her normal salary of $14,400 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 $6,000 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 $7,200 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 12-26 Close or Retain a Store [LO12-2] Superior Markets, Inc., operates three stores in a large metropolitan area. A segmented absorption costing income statement

Problem 12-26 Close or Retain a Store [LO12-2]

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	$	5,000,000	$	960,000		$	2,000,000	$	2,040,000
Cost of goods sold		2,750,000		600,000			1,028,000		1,122,000
Gross margin		2,250,000		360,000			972,000		918,000
Selling and administrative expenses:
Selling expenses		857,000		251,400			325,000		280,600
Administrative expenses		483,000		126,000			180,900		176,100
Total expenses		1,340,000		377,400			505,900		456,700
Net operating income (loss)	$	910,000	$	(17,400	)	$	466,100	$	461,300

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	$	246,000	$	64,400	$	73,000	$	108,600
Direct advertising		185,000		71,000		92,000		22,000
General advertising*		75,000		14,400		30,000		30,600
Store rent		283,000		81,000		108,000		94,000
Depreciation of store fixtures		26,000		6,600		8,000		11,400
Delivery salaries		27,000		9,000		9,000		9,000
Depreciation of delivery equipment		15,000		5,000		5,000		5,000
Total selling expenses	$	857,000	$	251,400	$	325,000	$	280,600

*Allocated on the basis of sales dollars.

	Total		North Store		South Store		East Store
Administrative expenses:
Store managers' salaries	$	100,000	$	31,000	$	40,000	$	29,000
General office salaries*		75,000		14,400		30,000		30,600
Insurance on fixtures and inventory		45,000		13,500		19,000		12,500
Utilities		70,800		25,280		19,100		26,420
Employment taxes		67,200		17,820		22,800		26,580
General officeother*		125,000		24,000		50,000		51,000
Total administrative expenses	$	483,000	$	126,000	$	180,900	$	176,100

*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 $13,400 per quarter. The general manager of the North Store would continue to earn her normal salary of $14,400 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 $6,000 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 $7,200 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?