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 $ 3,800,000 $ 760,000 $ 1,520,000 $ 1,520,000 Cost of goods sold 2,090,000 420,000 834,000 836,000 Gross margin 1,710,000 340,000 686,000 684,000 Selling and administrative expenses Selling expenses 833,000 239,400 319,000 274,600 Administrative expenses 423,000 114,000 162,900 146,100 Total expenses 1,256,000 353,400 481,900 420,700 Net operating income (loss) $ 454,000 $ (13,400 ) $ 204,100 $ 263,300 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 $ 248,200 $ 59,000 $ 87,800 $ 101,400 Direct advertising 173,000 59,000 80,000 34,000 General advertising 57,000 11,400 22,800 22,800 Store rent 300,000 93,000 110,000 97,000 Depreciation of store fixtures 20,000 5,400 6,800 7,800 Delivery salaries 23,400 7,800 7,800 7,800 Depreciation of delivery equipment 11,400 3,800 3,800 3,800 Total selling expenses $ 833,000 $ 239,400 $ 319,000 $ 274,600 Allocated on the basis of sales dollars Total North Store South Store East Store Administrative expenses Store managers' salaries $ 82,000 $ 25,000 $ 34,000 $ 23,000 General office salaries 57,000 11,400 22,800 22,800 Insurance on fixtures and inventory 33,000 9,900 13,000 10,100 Utilities 94,410 33,220 32,240 28,950 Employment taxes 61,590 15,480 22,860 23,250 General officeother 95,000 19,000 38,000 38,000 Total administrative expenses $ 423,000 $ 114,000 $ 162,900 $ 146,100 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 $10,400 per quarter The general manager of the North Store would continue to earn her normal salary of $11,400 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 $4,800 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 $5,700 per quarter Question 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

The Answer is in the image, click to view ...

Answered step by step

Verified Expert Solution

Link Copied!

Question

1 Approved Answer

Posted on Sep 14, 2024

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

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	$	3,800,000	$	760,000		$	1,520,000	$	1,520,000
Cost of goods sold		2,090,000		420,000			834,000		836,000
Gross margin		1,710,000		340,000			686,000		684,000
Selling and administrative expenses:
Selling expenses		833,000		239,400			319,000		274,600
Administrative expenses		423,000		114,000			162,900		146,100
Total expenses		1,256,000		353,400			481,900		420,700
Net operating income (loss)	$	454,000	$	(13,400	)	$	204,100	$	263,300

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	$	248,200	$	59,000	$	87,800	$	101,400
Direct advertising		173,000		59,000		80,000		34,000
General advertising*		57,000		11,400		22,800		22,800
Store rent		300,000		93,000		110,000		97,000
Depreciation of store fixtures		20,000		5,400		6,800		7,800
Delivery salaries		23,400		7,800		7,800		7,800
Depreciation of delivery equipment		11,400		3,800		3,800		3,800
Total selling expenses	$	833,000	$	239,400	$	319,000	$	274,600

*Allocated on the basis of sales dollars.

	Total		North Store		South Store		East Store
Administrative expenses:
Store managers' salaries	$	82,000	$	25,000	$	34,000	$	23,000
General office salaries*		57,000		11,400		22,800		22,800
Insurance on fixtures and inventory		33,000		9,900		13,000		10,100
Utilities		94,410		33,220		32,240		28,950
Employment taxes		61,590		15,480		22,860		23,250
General officeother*		95,000		19,000		38,000		38,000
Total administrative expenses	$	423,000	$	114,000	$	162,900	$	146,100

*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 $10,400 per quarter. The general manager of the North Store would continue to earn her normal salary of $11,400 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 $4,800 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 $5,700 per quarter.

Question

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?