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., 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 South Total store Store Sales $4,100,000 $860.000 $1.640.000 Cost of goods sold 2,255,000 515,000 860,000 Gross margin 1,845,000 345,000 780,000 Selling and administrative expenses Selling expenses 839,000 242,400 320,500 Administrative expenses 438,000 117,000 167,400 Total expenses 1,277,000 359,400 487.900 Net operating income (loss) $ 568,000 $(14,400) $ 292,100 Bast Store $1.600.000 880,000 720,000 276,100 153,600 429,700 $ 290, 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: North Store South Store East Store Total Selling expensest Sales salaries Direct advertising General advertising Store rent Depreciation of store fixtures Delivery salaries Depreciation of delivery equipment Total selling expenses $263,400 176.000 61,500 280,000 21.500 24,300 12,300 $ 69,600 62.000 12,900 80,000 5.700 8,100 4,100 $242,400 $ 80,600 83,000 24,600 113,000 7.100 8,100 4,100 $320,500 $113,200 31.000 24,000 87.000 8.700 8,100 4,100 $839,000 $276,100

Answer 1

1.Salary of new employee = $12,000

Delivery crew = $5,100

Sales Salaries = $69,600

Store manager Salaries = $26,500- 13,000 = $13,500

General Office Salaries = $6,500

Employee Salaries Avoided per Quarter = $106,700

2.Employment Taxes Avoided = 106,700*15% = $16,005

3.Financial Advantage = costs avoided –margin lost

= Direct Advertising cost + Store Rent +2/3^rd Insurance +Utilities + Salaries Avoided + Taxes Avoided- 340,000

= 62,000 + 80,000 + 10,800*2/3 + 27,620 + 106,700 + 16,005 – 345,000

= -$45,475 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

= (720,000/1,600,000)*860,000*1/4 – 45,475

=$51,275

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