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 $ 4,600,000   $ 920,000   $ 1,840,000   $ 1,840,000   Cost of goods sold   2,530,000     565,000     953,000     1,012,000   Gross margin   2,070,000     355,000     887,000     828,000   Selling and administrative expenses:                         Selling expenses   849,000     247,400     323,000     278,600   Administrative expenses   463,000     122,000     174,900     166,100   Total expenses   1,312,000     369,400     497,900     444,700   Net operating income (loss) $ 758,000   $ (14,400 ) $ 389,100   $ 383,300       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 $ 230,400 $ 62,200 $ 68,600 $ 99,600 Direct advertising   181,000   67,000   88,000   26,000 General advertising*   69,000   13,800   27,600   27,600 Store rent   305,000   85,000   118,000   102,000 Depreciation of store fixtures   24,000   6,200   7,600   10,200 Delivery salaries   25,800   8,600   8,600   8,600 Depreciation of delivery equipment   13,800   4,600   4,600   4,600 Total selling expenses $ 849,000 $ 247,400 $ 323,000 $ 278,600   *Allocated on the basis of sales dollars.     Total North Store South Store East Store Administrative expenses:                 Store managers' salaries $ 94,000 $ 29,000 $ 38,000 $ 27,000 General office salaries*   69,000   13,800   27,600   27,600 Insurance on fixtures and inventory   41,000   12,300   17,000   11,700 Utilities   81,120   26,860   24,880   29,380 Employment taxes   62,880   17,040   21,420   24,420 General office—other*   115,000   23,000   46,000   46,000 Total administrative expenses $ 463,000 $ 122,000 $ 174,900 $ 166,100   *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 $12,800 per quarter. The general manager of the North Store would continue to earn her normal salary of $13,800 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 person’s salary is $5,600 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 store’s fixtures. 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 $6,900 per quarter.   Required:   REQUIRED 1  How much employee salaries will the company avoid if it closes the North Store?         Employee salaries REQUIRED 2 How much employment taxes will the company avoid if it closes the North Store?         Employment taxes   REQUIRED 3  What is the financial advantage (disadvantage) of closing the North Store? (Enter any "disadvantages" as a negative value.)         Financial advantage (disadvantage)

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ISBN:9781259964947
Author:Libby
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Chapter1: Financial Statements And Business Decisions
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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 given below:

 

Superior Markets, Inc.
Income Statement
For the Quarter Ended September 30
  Total North
Store
South
Store
East
Store
Sales $ 4,600,000   $ 920,000   $ 1,840,000   $ 1,840,000  
Cost of goods sold   2,530,000     565,000     953,000     1,012,000  
Gross margin   2,070,000     355,000     887,000     828,000  
Selling and administrative expenses:                        
Selling expenses   849,000     247,400     323,000     278,600  
Administrative expenses   463,000     122,000     174,900     166,100  
Total expenses   1,312,000     369,400     497,900     444,700  
Net operating income (loss) $ 758,000   $ (14,400 ) $ 389,100   $ 383,300  
 

 

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:

 

  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 $ 230,400 $ 62,200 $ 68,600 $ 99,600
Direct advertising   181,000   67,000   88,000   26,000
General advertising*   69,000   13,800   27,600   27,600
Store rent   305,000   85,000   118,000   102,000
Depreciation of store fixtures   24,000   6,200   7,600   10,200
Delivery salaries   25,800   8,600   8,600   8,600
Depreciation of delivery
equipment
  13,800   4,600   4,600   4,600
Total selling expenses $ 849,000 $ 247,400 $ 323,000 $ 278,600
 

*Allocated on the basis of sales dollars.

 

  Total North
Store
South
Store
East
Store
Administrative expenses:                
Store managers' salaries $ 94,000 $ 29,000 $ 38,000 $ 27,000
General office salaries*   69,000   13,800   27,600   27,600
Insurance on fixtures and inventory   41,000   12,300   17,000   11,700
Utilities   81,120   26,860   24,880   29,380
Employment taxes   62,880   17,040   21,420   24,420
General office—other*   115,000   23,000   46,000   46,000
Total administrative expenses $ 463,000 $ 122,000 $ 174,900 $ 166,100
 

*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 $12,800 per quarter. The general manager of the North Store would continue to earn her normal salary of $13,800 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 person’s salary is $5,600 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 store’s fixtures.

  7. 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 $6,900 per quarter.

 

Required:

 

REQUIRED 1 

How much employee salaries will the company avoid if it closes the North Store?

 
 
 
 
Employee salaries

REQUIRED 2

How much employment taxes will the company avoid if it closes the North Store?

 
 
 
 

Employment taxes

 

REQUIRED 3 

What is the financial advantage (disadvantage) of closing the North Store? (Enter any "disadvantages" as a negative value.)

 
 
 
 
Financial advantage (disadvantage)

 

REQUIRED  5

Assume that the North Store's floor space can’t 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? (Enter any "disadvantages" as a negative value.)

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