Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Superior Markets, Incorporated, operates three stores in a large metropolitan area. A segmented absorption costing income statement for the company for the last quarter is

Superior Markets, Incorporated, 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, Incorporated Income Statement For the Quarter Ended September 30
Total North Store South Store East Store
Sales $ 3,720,000 $ 892,800 $ 1,488,000 $ 1,339,200
Cost of goods sold 2,054,928 499,968 818,400 736,560
Gross margin 1,665,072 392,832 669,600 602,640
Selling and administrative expenses:
Selling expenses 1,013,080 286,936 390,600 335,544
Administrative expenses 474,920 131,440 187,116 156,364
Total expenses 1,488,000 418,376 577,716 491,908
Net operating income (loss) $ 177,072 $ (25,544) $ 91,884 $ 110,732

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:

  1. 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 $ 296,360 $ 86,800 $ 110,360 $ 99,200
Direct advertising 231,880 63,240 89,280 79,360
General advertising* 55,800 13,392 22,320 20,088
Store rent 372,000 105,400 148,800 117,800
Depreciation of store fixtures 19,840 5,704 7,440 6,696
Delivery salaries 26,040 8,680 8,680 8,680
Depreciation of delivery equipment 11,160 3,720 3,720 3,720
Total selling expenses $ 1,013,080 $ 286,936 $ 390,600 $ 335,544

*Allocated on the basis of sales dollars.

Total North Store South Store East Store
Administrative expenses:
Store managers' salaries $ 86,800 $ 26,040 $ 37,200 $ 23,560
General office salaries* 62,000 14,880 24,800 22,320
Insurance on fixtures and inventory 31,000 9,300 11,160 10,540
Utilities 131,440 38,440 49,600 43,400
Employment taxes 70,680 20,460 27,156 23,064
General officeother* 93,000 22,320 37,200 33,480
Total administrative expenses $ 474,920 $ 131,440 $ 187,116 $ 156,364

*Allocated on the basis of sales dollars.

  1. The lease on the building housing the North Store can be broken with no penalty.

  2. The fixtures being used in the North Store would be transferred to the other two stores if the North Store were closed.

  3. 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 $13,640 per quarter. The general manager of the North Store would continue to earn her normal salary of $14,880 per quarter. All other managers and employees in the North store would be discharged.

  4. 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 $4,960 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.

  5. The company pays employment taxes equal to 15% of their employees' salaries.

  6. One-third of the insurance in the North Store is on the stores fixtures.

  7. The General office salaries and General officeother relate to the overall management of Superior Markets, Incorporated. 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 $7,440 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?

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Whispers In The Auditing Room

Authors: Azhar UL Haque

1st Edition

B0C63ZTK27, 979-8223789352

More Books

Students also viewed these Accounting questions