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 $ 4,800,000 $ 960,000 $ 1,920,000 $ 1,920,000 Cost of goods sold 2,640,000 600,000 984,000 1,056,000 Gross margin 2,160,000 360,000 936,000 864,000 Selling and administrative expenses Selling expenses 853,000 249,400 324,000 279,600 Administrative expenses 473,000 124,000 177,900 171,100 Total expenses 1,326,000 373,400 501,900 450,700 Net operating income (loss) $ 834,000 $ (13,400 ) $ 434,100 $ 413,300 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 $ 246,200 $ 59,000 $ 77,800 $ 109,400 Direct advertising 183,000 69,000 90,000 24,000 General advertising 72,000 14,400 28,800 28,800 Store rent 286,000 87,000 106,000 93,000 Depreciation of store fixtures 25,000 6,400 7,800 10,800 Delivery salaries 26,400 8,800 8,800 8,800 Depreciation of delivery equipment 14,400 4,800 4,800 4,800 Total selling expenses $ 853,000 $ 249,400 $ 324,000 $ 279,600 Allocated on the basis of sales dollars Total North Store South Store East Store Administrative expenses Store managers' salaries $ 97,000 $ 30,000 $ 39,000 $ 28,000 General office salaries 72,000 14,400 28,800 28,800 Insurance on fixtures and inventory 43,000 12,900 18,000 12,100 Utilities 74,760 25,870 20,940 27,950 Employment taxes 66,240 16,830 23,160 26,250 General officeother 120,000 24,000 48,000 48,000 Total administrative expenses $ 473,000 $ 124,000 $ 177,900 $ 171,100 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 $13,400 per quarter The general manager of the North Store would continue to earn her normal salary of $14,400 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 $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 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 $7,200 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

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

Answered step by step

Verified Expert Solution

Link Copied!

Question

1 Approved Answer

Posted on Jul 27, 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	$	4,800,000	$	960,000		$	1,920,000	$	1,920,000
Cost of goods sold		2,640,000		600,000			984,000		1,056,000
Gross margin		2,160,000		360,000			936,000		864,000
Selling and administrative expenses:
Selling expenses		853,000		249,400			324,000		279,600
Administrative expenses		473,000		124,000			177,900		171,100
Total expenses		1,326,000		373,400			501,900		450,700
Net operating income (loss)	$	834,000	$	(13,400	)	$	434,100	$	413,300

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	$	246,200	$	59,000	$	77,800	$	109,400
Direct advertising		183,000		69,000		90,000		24,000
General advertising*		72,000		14,400		28,800		28,800
Store rent		286,000		87,000		106,000		93,000
Depreciation of store fixtures		25,000		6,400		7,800		10,800
Delivery salaries		26,400		8,800		8,800		8,800
Depreciation of delivery equipment		14,400		4,800		4,800		4,800
Total selling expenses	$	853,000	$	249,400	$	324,000	$	279,600

*Allocated on the basis of sales dollars.

	Total		North Store		South Store		East Store
Administrative expenses:
Store managers' salaries	$	97,000	$	30,000	$	39,000	$	28,000
General office salaries*		72,000		14,400		28,800		28,800
Insurance on fixtures and inventory		43,000		12,900		18,000		12,100
Utilities		74,760		25,870		20,940		27,950
Employment taxes		66,240		16,830		23,160		26,250
General officeother*		120,000		24,000		48,000		48,000
Total administrative expenses	$	473,000	$	124,000	$	177,900	$	171,100

*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 $13,400 per quarter. The general manager of the North Store would continue to earn her normal salary of $14,400 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 $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.
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 $7,200 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?