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

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	$	3,840,000		$	921,600		$	1,536,000		$	1,382,400
Cost of goods sold		2,121,216			516,096			844,800			760,320
Gross margin		1,718,784			405,504			691,200			622,080
Selling and administrative expenses:
Selling expenses		1,045,760			296,192			403,200			346,368
Administrative expenses		490,240			135,680			193,152			161,408
Total expenses		1,536,000			431,872			596,352			507,776
Net operating income (loss)	$	182,784		$	(26,368	)	$	94,848		$	114,304

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:

1. 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	$	305,920	$	89,600	$	113,920	$	102,400
Direct advertising		239,360		65,280		92,160		81,920
General advertising*		57,600		13,824		23,040		20,736
Store rent		384,000		108,800		153,600		121,600
Depreciation of store fixtures		20,480		5,888		7,680		6,912
Delivery salaries		26,880		8,960		8,960		8,960
Depreciation of delivery equipment		11,520		3,840		3,840		3,840
Total selling expenses	$	1,045,760	$	296,192	$	403,200	$	346,368

*Allocated on the basis of sales dollars.

	Total		North Store		South Store		East Store
Administrative expenses:
Store managers' salaries	$	89,600	$	26,880	$	38,400	$	24,320
General office salaries*		64,000		15,360		25,600		23,040
Insurance on fixtures and inventory		32,000		9,600		11,520		10,880
Utilities		135,680		39,680		51,200		44,800
Employment taxes		72,960		21,120		28,032		23,808
General officeother*		96,000		23,040		38,400		34,560
Total administrative expenses	$	490,240	$	135,680	$	193,152	$	161,408

*Allocated on the basis of sales dollars.

1. The lease on the building housing the North Store can be broken with no penalty.

2. The fixtures being used in the North Store would be transferred to the other two stores if the North Store were closed.

3. 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 $14,080 per quarter. The general manager of the North Store would continue to earn her normal salary of $15,360 per quarter. All other managers and employees in the North store would be discharged.

4. 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 $5,120 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.

5. The company pays employment taxes equal to 15% of their employees' salaries.

6. One-third of the insurance in the North Store is on the stores fixtures.

7. 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 $7,680 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?