Problem 13 26 (Algo) Close or Retain a Store LO13 2 Superior Markets, Incorporated, 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, Incorporated Income Statement For the Quarter Ended September 30 Total North Store South Store East Store Sales $ 3,300,000 $ 792,000 $ 1,320,000 $ 1,188,000 Cost of goods sold 1,822,920 443,520 726,000 653,400 Gross margin 1,477,080 348,480 594,000 534,600 Selling and administrative expenses Selling expenses 898,700 254,540 346,500 297,660 Administrative expenses 421,300 116,600 165,990 138,710 Total expenses 1,320,000 371,140 512,490 436,370 Net operating income (loss) $ 157,080 $ (22,660) $ 81,510 $ 98,230 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 $ 262,900 $ 77,000 $ 97,900 $ 88,000 Direct advertising 205,700 56,100 79,200 70,400 General advertising 49,500 11,880 19,800 17,820 Store rent 330,000 93,500 132,000 104,500 Depreciation of store fixtures 17,600 5,060 6,600 5,940 Delivery salaries 23,100 7,700 7,700 7,700 Depreciation of delivery equipment 9,900 3,300 3,300 3,300 Total selling expenses $ 898,700 $ 254,540 $ 346,500 $ 297,660 Allocated on the basis of sales dollars Total North Store South Store East Store Administrative expenses Store managers' salaries $ 77,000 $ 23,100 $ 33,000 $ 20,900 General office salaries 55,000 13,200 22,000 19,800 Insurance on fixtures and inventory 27,500 8,250 9,900 9,350 Utilities 116,600 34,100 44,000 38,500 Employment taxes 62,700 18,150 24,090 20,460 General officeother 82,500 19,800 33,000 29,700 Total administrative expenses $ 421,300 $ 116,600 $ 165,990 $ 138,710 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 $12,100 per quarter The general manager of the North Store would continue to earn her normal salary of $13,200 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 $4,400 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, Incorporated 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 $6,600 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 rev 11 11 2020 QC CS 240355 Prev

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Problem 13-26 (Algo) Close or Retain a Store [LO13-2] Superior Markets, Incorporated, operates three stores in a large metropolitan area. A segmented absorption costing income

Problem 13-26 (Algo) Close or Retain a Store [LO13-2]

Superior Markets, Incorporated, operates three stores in a large metropolitan area. A segmented absorption costing income statement for the company for the last quarter is given below:

	Total	North Store	South Store	East Store
Superior Markets, Incorporated Income Statement For the Quarter Ended September 30
Sales	$ 3,300,000	$ 792,000	$ 1,320,000	$ 1,188,000
Cost of goods sold	1,822,920	443,520	726,000	653,400
Gross margin	1,477,080	348,480	594,000	534,600
Selling and administrative expenses:
Selling expenses	898,700	254,540	346,500	297,660
Administrative expenses	421,300	116,600	165,990	138,710
Total expenses	1,320,000	371,140	512,490	436,370
Net operating income (loss)	$ 157,080	$ (22,660)	$ 81,510	$ 98,230

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	$ 262,900	$ 77,000	$ 97,900	$ 88,000
Direct advertising	205,700	56,100	79,200	70,400
General advertising*	49,500	11,880	19,800	17,820
Store rent	330,000	93,500	132,000	104,500
Depreciation of store fixtures	17,600	5,060	6,600	5,940
Delivery salaries	23,100	7,700	7,700	7,700
Depreciation of delivery equipment	9,900	3,300	3,300	3,300
Total selling expenses	$ 898,700	$ 254,540	$ 346,500	$ 297,660

*Allocated on the basis of sales dollars.

	Total	North Store	South Store	East Store
Administrative expenses:
Store managers' salaries	$ 77,000	$ 23,100	$ 33,000	$ 20,900
General office salaries*	55,000	13,200	22,000	19,800
Insurance on fixtures and inventory	27,500	8,250	9,900	9,350
Utilities	116,600	34,100	44,000	38,500
Employment taxes	62,700	18,150	24,090	20,460
General officeother*	82,500	19,800	33,000	29,700
Total administrative expenses	$ 421,300	$ 116,600	$ 165,990	$ 138,710

*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 $12,100 per quarter. The general manager of the North Store would continue to earn her normal salary of $13,200 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 $4,400 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, Incorporated. 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 $6,600 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?

rev: 11_11_2020_QC_CS-240355