Superior Markets, Inc., operates three stores in a large metropolitan area. A segmented income statement for the company for the last quarter is given below: SUPERIOR MARKETS, INC. Income Statement For the Quarter Ended September 30 North South East Total Store Store Store Sales $ 3,000,000 $ 720,000 $1,200,000 $1,080,000 Cost of goods sold 1 ,657,200 403,200 660,000 594,000 Gross Margin 1,342,800 316,800 540,000 486,000 Operating expenses: Selling expenses 817,000 231,400 315,000 270,600 Administrative expenses 383,000 106,000 150,900 126,100 Total expenses 1,200,000 337,400 465,900 396,700 Net operating income (loss) $ 142,800 $ (20,600) $ 74,100 $ 89,300 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 retained 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 South East Total Store Store Store Selling expenses: Sales salaries (f) $ 239,000 $ 70,000 $ 89,000 $ 80,000 Direct advertising 187,000 51,000 72,000 64,000 General advertising* 45,000 10,800 18,000 16,200 Store rent (b) 300,000 85,000 120,000 95,000 Depreciation of store fixtures(c) 16,000 4,600 6,000 5,400 Delivery salaries (e,f) 21,000 7,000 7,000 7,000 Depreciation of delivery equipment (e) 9,000 3,000 3,000 3,000 Total selling expenses $ 817,000 $ 231,400 $ 315,000 $ 270,600 *Allocated on the basis of sales dollars. Advertising would remain at the same level if North Store were closed and still be a total of $45,000 for the company. North South East Total Store Store Store Administrative expenses: Store management salaries(d,f) $ 70,000 $ 21,000 $ 30,000 $ 19,000 General office salaries*(f,h) 50,000 12,000 20,000 18,000 Insurance on fixtures and inventory (g) 25,000 7,500 9,000 8,500 Utilities 106,000 31,000 40,000 35,000 Employment taxes (f) 57,000 16,500 21,900 18,600 General office ? other* (i) 75,000 18,000 30,000 27,000 Total administrative expenses $383,000 $ 106,000 $ 150,900 $ 126,100 *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 store fixtures being used in the North Store would be retained and transferred to the other stores if the North Store were closed. d. One of the store managers 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. The general manager of the North Store would be retained at her normal salary of $12,000 per quarter. All other employees and managers 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 $4,000 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 which will be transferred to the other stores along with the fixtures. h. The ?General office salaries? 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 salary is $6,000 per quarter. i. General office-other also relates to the overall operation of Superior Markets, Inc., and will be allocated to the other stores if North Store is closed. Required 1. Prepare a schedule showing the change in revenues and expenses and the impact on the company?s overall net income that would result if the North Store were closed. What is your recommendation? Student Name: Class: Problem 11-19 Requirement 1: SUPERIOR MARKETS, INC. Schedule Gross margin lost if the store is closed Costs which can be avoided: Sales salaries Direct advertising Store rent Delivery salaries Store management salaries Salary of new manager General office compensation Insurance on inventories Utilities Employment taxes* Decrease in company net operating income if the Downtown Store is closed *Salaries avoided by closing store: Sales salaries Delivery salaries Store management salaries Salary of new manager General office compensation Total avoided Employment tax rate Employment taxes avoided Requirement 2: Assuming the store space can't be subleased, what recommendation would you make to the management of Superior Markets, Inc.? Requirement 3: Computations Gross margin lost if the store is closed Gross margin gained at the Uptown Store Net operating loss in gross margin Less avoidable costs if North store is closed Net advantage of closing North Store $81,000 81,000 $81,000 Try again! Given Data P11-19: SUPERIOR MARKETS, INC. Income Statement For the Quarter Ended September 30 Sales Cost of goods sold Gross margin Selling and administrative expenses: Selling expenses: Sales salaries Direct advertising General advertising Store rent Depreciation of store fixtures Delivery salaries Depreciation of delivery equipment Total selling expenses Administrative expenses: Store management salaries General office salaries Insurance on fixtures and inventory Utilities Employment taxes General office - other Total administrative expenses Total expenses Net operating income (loss) Additional Data: Manager's salary per quarter New employee's salary per quarter Employment tax as a percentage of salaries Delivery person's salary per quarter Insurance related to downtown fixtures Discharged employee's salary per quarter Assumed sales transferred to East store Total $3,000,000 1,657,200 1,342,800 North Store $720,000 403,200 316,800 South Store $1,200,000 660,000 540,000 East Store $1,080,000 594,000 486,000 239,000 187,000 45,000 300,000 16,000 21,000 9,000 817,000 70,000 51,000 10,800 85,000 4,600 7,000 3,000 231,400 89,000 72,000 18,000 120,000 6,000 7,000 3,000 315,000 80,000 64,000 16,200 95,000 5,400 7,000 3,000 270,600 70,000 50,000 25,000 106,000 57,000 75,000 383,000 1,200,000 $142,800 21,000 12,000 7,500 31,000 16,500 18,000 106,000 337,400 $(20,600) 30,000 20,000 9,000 40,000 21,900 30,000 150,900 465,900 $74,100 19,000 18,000 8,500 35,000 18,600 27,000 126,100 396,700 $89,300 $12,000 $11,000 15% $4,000 1/3 $6,000 25% Student Name: Class: Problem 11-19 Requirement 1: SUPERIOR MARKETS, INC. Schedule Gross margin lost if the store is closed Costs which can be avoided: Sales salaries Direct advertising Store rent Delivery salaries Store management salaries Salary of new manager General office compensation Insurance on inventories Utilities Employment taxes* Decrease in company net operating income if the Downtown Store is closed *Salaries avoided by closing store: Sales salaries Delivery salaries Store management salaries Salary of new manager General office compensation Total avoided Employment tax rate Employment taxes avoided Requirement 2: Assuming the store space can't be subleased, what recommendation would you make to the management of Superior Markets, Inc.? Requirement 3: Computations Gross margin lost if the store is closed Gross margin gained at the Uptown Store Net operating loss in gross margin Less avoidable costs if North store is closed Net advantage of closing North Store $81,000 81,000 $81,000 Try again! Given Data P11-19: SUPERIOR MARKETS, INC. Income Statement For the Quarter Ended September 30 Sales Cost of goods sold Gross margin Selling and administrative expenses: Selling expenses: Sales salaries Direct advertising General advertising Store rent Depreciation of store fixtures Delivery salaries Depreciation of delivery equipment Total selling expenses Administrative expenses: Store management salaries General office salaries Insurance on fixtures and inventory Utilities Employment taxes General office - other Total administrative expenses Total expenses Net operating income (loss) Additional Data: Manager's salary per quarter New employee's salary per quarter Employment tax as a percentage of salaries Delivery person's salary per quarter Insurance related to downtown fixtures Discharged employee's salary per quarter Assumed sales transferred to East store Total $3,000,000 1,657,200 1,342,800 North Store $720,000 403,200 316,800 South Store $1,200,000 660,000 540,000 East Store $1,080,000 594,000 486,000 239,000 187,000 45,000 300,000 16,000 21,000 9,000 817,000 70,000 51,000 10,800 85,000 4,600 7,000 3,000 231,400 89,000 72,000 18,000 120,000 6,000 7,000 3,000 315,000 80,000 64,000 16,200 95,000 5,400 7,000 3,000 270,600 70,000 50,000 25,000 106,000 57,000 75,000 383,000 1,200,000 $142,800 21,000 12,000 7,500 31,000 16,500 18,000 106,000 337,400 $(20,600) 30,000 20,000 9,000 40,000 21,900 30,000 150,900 465,900 $74,100 19,000 18,000 8,500 35,000 18,600 27,000 126,100 396,700 $89,300 $12,000 $11,000 15% $4,000 1/3 $6,000 25% Student Name: Class: Problem 11-19 Requirement 1: SUPERIOR MARKETS, INC. Schedule Gross margin lost if the store is closed Costs which can be avoided: Sales salaries Direct advertising Store rent Delivery salaries Store management salaries Salary of new manager General office compensation Insurance on inventories Utilities Employment taxes* Decrease in company net operating income if the Downtown Store is closed *Salaries avoided by closing store: Sales salaries Delivery salaries Store management salaries Salary of new manager General office compensation Total avoided Employment tax rate Employment taxes avoided Requirement 2: Assuming the store space can't be subleased, what recommendation would you make to the management of Superior Markets, Inc.? Requirement 3: Computations Gross margin lost if the store is closed Gross margin gained at the Uptown Store Net operating loss in gross margin Less avoidable costs if North store is closed Net advantage of closing North Store $81,000 81,000 $81,000 Try again! Given Data P11-19: SUPERIOR MARKETS, INC. Income Statement For the Quarter Ended September 30 Sales Cost of goods sold Gross margin Selling and administrative expenses: Selling expenses: Sales salaries Direct advertising General advertising Store rent Depreciation of store fixtures Delivery salaries Depreciation of delivery equipment Total selling expenses Administrative expenses: Store management salaries General office salaries Insurance on fixtures and inventory Utilities Employment taxes General office - other Total administrative expenses Total expenses Net operating income (loss) Additional Data: Manager's salary per quarter New employee's salary per quarter Employment tax as a percentage of salaries Delivery person's salary per quarter Insurance related to downtown fixtures Discharged employee's salary per quarter Assumed sales transferred to East store Total $3,000,000 1,657,200 1,342,800 North Store $720,000 403,200 316,800 South Store $1,200,000 660,000 540,000 East Store $1,080,000 594,000 486,000 239,000 187,000 45,000 300,000 16,000 21,000 9,000 817,000 70,000 51,000 10,800 85,000 4,600 7,000 3,000 231,400 89,000 72,000 18,000 120,000 6,000 7,000 3,000 315,000 80,000 64,000 16,200 95,000 5,400 7,000 3,000 270,600 70,000 50,000 25,000 106,000 57,000 75,000 383,000 1,200,000 $142,800 21,000 12,000 7,500 31,000 16,500 18,000 106,000 337,400 $(20,600) 30,000 20,000 9,000 40,000 21,900 30,000 150,900 465,900 $74,100 19,000 18,000 8,500 35,000 18,600 27,000 126,100 396,700 $89,300 $12,000 $11,000 15% $4,000 1/3 $6,000 25% Student Name: Class: Problem 11-19 Requirement 1: SUPERIOR MARKETS, INC. Schedule Gross margin lost if the store is closed Costs which can be avoided: Sales salaries Direct advertising Store rent Delivery salaries Store management salaries Salary of new manager General office compensation Insurance on inventories Utilities Employment taxes* Decrease in company net operating income if the Downtown Store is closed *Salaries avoided by closing store: Sales salaries Delivery salaries Store management salaries Salary of new manager General office compensation Total avoided Employment tax rate Employment taxes avoided Requirement 2: Assuming the store space can't be subleased, what recommendation would you make to the management of Superior Markets, Inc.? Requirement 3: Computations Gross margin lost if the store is closed Gross margin gained at the Uptown Store Net operating loss in gross margin Less avoidable costs if North store is closed Net advantage of closing North Store $81,000 81,000 $81,000 Try again! Given Data P11-19: SUPERIOR MARKETS, INC. Income Statement For the Quarter Ended September 30 Sales Cost of goods sold Gross margin Selling and administrative expenses: Selling expenses: Sales salaries Direct advertising General advertising Store rent Depreciation of store fixtures Delivery salaries Depreciation of delivery equipment Total selling expenses Administrative expenses: Store management salaries General office salaries Insurance on fixtures and inventory Utilities Employment taxes General office - other Total administrative expenses Total expenses Net operating income (loss) Additional Data: Manager's salary per quarter New employee's salary per quarter Employment tax as a percentage of salaries Delivery person's salary per quarter Insurance related to downtown fixtures Discharged employee's salary per quarter Assumed sales transferred to East store Total $3,000,000 1,657,200 1,342,800 North Store $720,000 403,200 316,800 South Store $1,200,000 660,000 540,000 East Store $1,080,000 594,000 486,000 239,000 187,000 45,000 300,000 16,000 21,000 9,000 817,000 70,000 51,000 10,800 85,000 4,600 7,000 3,000 231,400 89,000 72,000 18,000 120,000 6,000 7,000 3,000 315,000 80,000 64,000 16,200 95,000 5,400 7,000 3,000 270,600 70,000 50,000 25,000 106,000 57,000 75,000 383,000 1,200,000 $142,800 21,000 12,000 7,500 31,000 16,500 18,000 106,000 337,400 $(20,600) 30,000 20,000 9,000 40,000 21,900 30,000 150,900 465,900 $74,100 19,000 18,000 8,500 35,000 18,600 27,000 126,100 396,700 $89,300 $12,000 $11,000 15% $4,000 1/3 $6,000 25%