Problem 13-28 (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	$ 3,720,000	$ 892,800	$ 1,488,000	$ 1,339,200
Cost of goods sold	2,054,928	499,968	818,400	736,560
Gross margin	1,665,072	392,832	669,600	602,640
Selling and administrative expenses:
Selling expenses	1,013,080	286,936	390,600	335,544
Administrative expenses	474,920	131,440	187,116	156,364
Total expenses	1,488,000	418,376	577,716	491,908
Net operating income (loss)	$ 177,072	$ (25,544)	$ 91,884	$ 110,732

The North Store has consistently shown losses over the past two years, so management is considering closing this store.

1. A detailed breakdown of the selling and administrative expenses shown above is as follows:

	Total	North Store	South Store	East Store
Selling expenses:
Sales salaries	$ 296,360	$ 86,800	$ 110,360	$ 99,200
Direct advertising	231,880	63,240	89,280	79,360
General advertising*	55,800	13,392	22,320	20,088
Store rent	372,000	105,400	148,800	117,800
Depreciation of store fixtures	19,840	5,704	7,440	6,696
Delivery salaries	26,040	8,680	8,680	8,680
Depreciation of delivery equipment	11,160	3,720	3,720	3,720
Total selling expenses	$ 1,013,080	$ 286,936	$ 390,600	$ 335,544

1. *Allocated on the basis of sales dollars.

	Total	North Store	South Store	East Store
Administrative expenses:
Store managers' salaries	$ 86,800	$ 26,040	$ 37,200	$ 23,560
General office salaries*	62,000	14,880	24,800	22,320
Insurance on fixtures and inventory	31,000	9,300	11,160	10,540
Utilities	131,440	38,440	49,600	43,400
Employment taxes	70,680	20,460	27,156	23,064
General officeother*	93,000	22,320	37,200	33,480
Total administrative expenses	$ 474,920	$ 131,440	$ 187,116	$ 156,364

1. *Allocated on the basis of sales dollars.
2. The North Stores rental agreement can be broken with no penalty.
3. The North Stores fixtures would be transferred to the other two stores if it were closed.
4. The North Stores general manager would be transferred to another position in the company if it were closed. She would fill a position that otherwise would have required hiring a new employee at a salary of $13,640 per quarter. The general manager of the North Store would continue to earn her normal salary of $14,880 per quarter. All other managers and employees in the North Store would be discharged.
5. 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 $4,960 per quarter. The delivery equipment would be distributed to the other stores. The equipment does not wear out through use.
6. The company pays employment taxes equal to 15% of their employees' salaries.
7. One-third of the North Stores insurance relates to its fixtures.
8. 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 $7,440 per quarter.

Required:

• How much employee salaries will the company avoid if it closes the North Store?
• How much employment taxes will the company avoid if it closes the North Store?
• What is the financial advantage (disadvantage) of closing the North Store?
• Assuming the North Store's floor space cant be subleased, would you recommend closing the North Store?
• Assume the North Store's floor space cant be subleased. However, let's introduce three more assumptions. First, 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, the East Store has enough capacity to handle the increased sales that would arise from closing the North Store. Third, 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?