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 North Store South Store East Store Total Sales Cost of goods sold Gross margin Selling and administrative expenses Selling expenses Administrative expenses Total expenses Net operating income (loss) $4,800,000 $960,000 $1,920,000 $1,920,000 2,640.000 2,160,000 600,000 360,000 984,000 1,056,000 936,000 864,000 279,600 171,100 450,700 $834,000 (13,400) 434,100 413,300 853,000 473,000 1,326,000 249,400 124,000 373,400 324,000 177,900 501,900 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 a. The breakdown of the selling and administrative expenses is as follows North Store South Store East Store Total Selling expenses Sales salaries Direct advertising General advertising* Store rent Depreciation of store fixtures Delivery salaries Depreciation of delivery equipment Total selling expenses $ 246,200 59,000 69,000 14,400 87,000 6,400 8,800 4,800 $ 853,000 249,400 183,000 72,000 286,000 25,000 26,400 14,400 77,800 109,400 24,000 28,800 93,000 10,800 8,800 4,800 324,000 279,600 90,000 28,800 106,000 7,800 8,800 4,800 Allocated on the basis of sales dollars North Store South Store Total Store Administrative expenses: Store management salaries General office salaries* Insurance on fixtures and inventory Utilities $ 97,000 30,000 S 39,000 28,000 28,800 12,100 74,76025,870 20,94027,950 26,250 48.000 72,000 43,000 28,800 18,000 23,160 S 473,000 124,000 177,900 12,900 66,240 120,000 16,830 24,000 General office-other Total administrative expenses 171,100 Allocated on the basis of sales dollars b. The lease on the building housing the North Store can be broken with no penalty. C. The fixtures being used in the North Store would be transferred to the other two stores if the North Store were closed. d. 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 $13,400 per quarter. The general manager of the North Store would be retained at her normal salary of $14,400 per quarter. All other employees in the store would be discharged. e. The company has one delivery crew that serves all three stores. One delivery person could be discharged if the North Store were closed. This person's salary is $5,800 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. f. The company's employment taxes are 15% of salaries. g. One-third of the insurance in the North Store is on the store's fixtures. h. The "General office salaries" and "General office -other" 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 person's compensation is $7,200 per quarter. Required 1. Prepare a schedule showing the change in revenues and expenses and the impact on the company's overall net operating income that would result if the North Store were closed. (Any losses/ reductions should be indicated by a minus sign.) Costs that can be avoided Total costs that can be avoided 2. Based on your computations in (1) above, what recommendation would you make to the management of Superior Markets, Inc.? The North Store should be closed. The North Store should not be closed 3. Assume that if the North Store were closed, at least one-fourth of its sales would transfer to the East Store, due to strong customer loyalty to Superior Markets. The East Store has enough capacity to handle the increased sales. You may assume that the increased sales in the East Store would yield the same gross margin as a percentage of sales as present sales in that store. a. Calculate the net advantage of closing the North Store. (Any losses should be indicated by a minus sign.) Gross margin lost if the North Store is closed Gross margin gained from the East Store Net operating (loss) in gross margin Less costs that can be avoided if the North Store is closed Net advantage (disadvantage) of closing the North store 01 b. What recommendation would you make to the management of Superior Markets, Inc.? The North Store should be closed. The North Store should not be closed