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 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 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 $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 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 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 $7,680 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

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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

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:

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.

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 $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.
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.
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 $7,680 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?