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 $ 4,200,000 $ 1,008,000 $ 1,680,000 $ 1,512,000 Cost of goods sold 2,320,080 564,480 924,000 831,600 Gross margin 1,879,920 443,520 756,000 680,400 Selling and administrative expenses: Selling expenses 1,143,800 323,960 441,000 378,840 Administrative expenses 536,200 148,400 211,260 176,540 Total expenses 1,680,000 472,360 652,260 555,380 Net operating income (loss) $ 199,920 $ (28,840) $ 103,740 $ 125,020 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 $ 334,600 $ 98,000 $ 124,600 $ 112,000 Direct advertising 261,800 71,400 100,800 89,600 General advertising* 63,000 15,120 25,200 22,680 Store rent 420,000 119,000 168,000 133,000 Depreciation of store fixtures 22,400 6,440 8,400 7,560 Delivery salaries 29,400 9,800 9,800 9,800 Depreciation of delivery equipment 12,600 4,200 4,200 4,200 Total selling expenses $ 1,143,800 $ 323,960 $ 441,000 $ 378,840 *Allocated on the basis of sales dollars. Total North Store South Store East Store Administrative expenses: Store managers' salaries $ 98,000 $ 29,400 $ 42,000 $ 26,600 General office salaries* 70,000 16,800 28,000 25,200 Insurance on fixtures and inventory 35,000 10,500 12,600 11,900 Utilities 148,400 43,400 56,000 49,000 Employment taxes 79,800 23,100 30,660 26,040 General office—other* 105,000 25,200 42,000 37,800 Total administrative expenses $ 536,200 $ 148,400 $ 211,260 $ 176,540 *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 $15,400 per quarter. The general manager of the North Store would continue to earn her normal salary of $16,800 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, Incorporated. 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 $8,400 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 can’t be subleased, would you recommend closing the North Store? 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? Sub parts 1,2,3, and 5 only
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 | $ 4,200,000 | $ 1,008,000 | $ 1,680,000 | $ 1,512,000 |
| Cost of goods sold | 2,320,080 | 564,480 | 924,000 | 831,600 |
| Gross margin | 1,879,920 | 443,520 | 756,000 | 680,400 |
| Selling and administrative expenses: | ||||
| Selling expenses | 1,143,800 | 323,960 | 441,000 | 378,840 |
| Administrative expenses | 536,200 | 148,400 | 211,260 | 176,540 |
| Total expenses | 1,680,000 | 472,360 | 652,260 | 555,380 |
| Net operating income (loss) | $ 199,920 | $ (28,840) | $ 103,740 | $ 125,020 |
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 | $ 334,600 | $ 98,000 | $ 124,600 | $ 112,000 |
| Direct advertising | 261,800 | 71,400 | 100,800 | 89,600 |
| General advertising* | 63,000 | 15,120 | 25,200 | 22,680 |
| Store rent | 420,000 | 119,000 | 168,000 | 133,000 |
| Depreciation of store fixtures | 22,400 | 6,440 | 8,400 | 7,560 |
| Delivery salaries | 29,400 | 9,800 | 9,800 | 9,800 |
| Depreciation of delivery equipment | 12,600 | 4,200 | 4,200 | 4,200 |
| Total selling expenses | $ 1,143,800 | $ 323,960 | $ 441,000 | $ 378,840 |
*Allocated on the basis of sales dollars.
| Total | North Store | South Store | East Store | |
|---|---|---|---|---|
| Administrative expenses: | ||||
| Store managers' salaries | $ 98,000 | $ 29,400 | $ 42,000 | $ 26,600 |
| General office salaries* | 70,000 | 16,800 | 28,000 | 25,200 |
| Insurance on fixtures and inventory | 35,000 | 10,500 | 12,600 | 11,900 |
| Utilities | 148,400 | 43,400 | 56,000 | 49,000 |
| Employment taxes | 79,800 | 23,100 | 30,660 | 26,040 |
| General office—other* | 105,000 | 25,200 | 42,000 | 37,800 |
| Total administrative expenses | $ 536,200 | $ 148,400 | $ 211,260 | $ 176,540 |
*Allocated on the basis of sales dollars.
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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 $15,400 per quarter. The general manager of the North Store would continue to earn her normal salary of $16,800 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, Incorporated. 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 $8,400 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 can’t be subleased, would you recommend closing the North Store?
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?
Sub parts 1,2,3, and 5 only
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