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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 $ 4,000,000 $ 840,000 $ 1,600,000 $ 1,560,000
Cost of goods sold 2,200,000 495,000 847,000 858,000

Gross margin 1,800,000 345,000 753,000 702,000

Selling and administrative expenses:
Selling expenses: 837,000 241,400 320,000 275,600
Administrative expenses 433,000 116,000 165,900 151,100

Total expenses 1,270,000 357,400 485,900 426,700

Net operating income (loss) $ 530,000 $ (12,400 ) $ 267,100 $ 275,300

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:

a. The breakdown of the selling and administrative expenses is as follows:

Total North Store South Store East Store
Selling expenses:
Sales salaries $ 235,000 $ 55,200 $ 83,000 $ 96,800
Direct advertising 175,000 61,000 82,000 32,000
General advertising* 60,000 12,600 24,000 23,400
Store rent 310,000 95,000 112,000 103,000
Depreciation of store fixtures 21,000 5,600 7,000 8,400
Delivery salaries 24,000 8,000 8,000 8,000
Depreciation of delivery equipment 12,000 4,000 4,000 4,000

Total selling expenses $ 837,000 $ 241,400 $ 320,000 $ 275,600

*Allocated on the basis of sales dollars.

Total North Store South Store East Store
Administrative expenses:
Store management salaries $ 85,000 $ 26,000 $ 35,000 $ 24,000
General office salaries* 60,000 12,600 24,000 23,400
Insurance on fixtures and inventory 35,000 10,500 14,000 10,500
Utilities 92,400 30,630 30,400 31,370
Employment taxes 60,600 15,270 22,500 22,830
General office other* 100,000 21,000 40,000 39,000

Total administrative expenses $ 433,000 $ 116,000 $ 165,900 $ 151,100

*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 $11,600 per quarter. The general manager of the North Store would be retained at her normal salary of $12,600 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 persons salary is $5,000 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 companys employment taxes are 15% of salaries.
g. One-third of the insurance in the North Store is on the stores fixtures.
h.

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 $6,300 per quarter.

Required:
1.

Prepare a schedule showing the change in revenues and expenses and the impact on the companys overall net operating income that would result if the North Store were closed. (Any losses/ reductions should be indicated by a minus sign.)

image text in transcribed

image text in transcribed

Answer is not complete Gross margin lost if the store is closed Costs that can be avoided: Store rent Sales salaries Delivery salaries Insurance on inventories Employment taxes Direct advertising Utilities Store management salaries General Salary of new manager l office compensation ecrease in company profits if the North Store is closed 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. 0The 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 reductions or outflows should be indicated by a minus sign.)

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