Question

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 North Total Store Sales $4,600,000 $920,000 Cost of goods sold 2,530,000 565,000 Gross margin 2,070,000 355,000 Selling and administrative expenses: Selling expenses 849,000 247,400 Administrative expenses 463,000 122,000 Total expenses 1,312,000 369,400 Net operating income (loss) $ 758,000 $(14,400) South Store $1,840,000 953,000 887,000 East Store $1,840,000 1,012,000 828,000 323,000 174,900 497,900 389,100 278,600 166,100 444,700 383,300 $ $ 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: a. 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 Direct advertising General advertising Store rent Depreciation of store fixtures Delivery salaries Depreciation of delivery equipment Total selling expenses $ 230,400 181,000 69,000 305,000 24,000 25,800 $ 62,200 67,000 13,800 85,000 6,200 8,600 $ 68,600 88,000 27,600 118,000 7,600 8,600 $ 99,600 26,000 27,600 102,000 10,200 8,600 13,800 $849,000 4,600 $247,400 4,600 $323,000 4,600 $278,600 *Allocated on the basis of sales dollars.

Answer 1

1.Salary of new employee = $12,800

Delivery crew = $5,600

Sales Salaries = $62,200

Store manager Salaries = $29,000- 13,800 = $15,200

General Office Salaries = $6,900

Employee Salaries Avoided per Quarter = $102,700

2.Employment Taxes Avoided = 102,700*15% = $15,405

3.Financial Advantage = costs avoided –margin lost

= Direct Advertising cost + Store Rent +2/3^rd Insurance +Utilities + Salaries Avoided + Taxes Avoided- 355,000

= 67,000 + 85,000 + 12,300*2/3 + 26,860 + 102,700 + 15,405 – 355,000

= -$49,835 i.e. disadvantage

4.North store should not be closed, as there is a loss in closing the store

5.Financial Advantage of closing the north store = Gross Margin from Increased sales of East Store – Disadvantage calculated above

= (828,000/1,840,000)*920,000*1/4 – 49,835

=$53,665

Since there is net advantage, the store should be closed.