Problem - Superior Markets, Inc., operates three stores in a large metropolitan area. A segmented income statement for the company for the last quarter is given below:
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SUPERIOR MARKETS, INC. Income Statement For the Quarter Ended September 30
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Total
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North Store
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South Store
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East Store
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Sales
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$3,000,000
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$720,000
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$1,200,000
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$1,080,000
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Cost of goods sold
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1,657,200
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403,200
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660,000
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594,000
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Gross margin
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1,342,800
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316,800
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540,000
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486,000
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Selling and administrative expenses:
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Selling expenses:
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Sales salaries
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239,000
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70,000
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89,000
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80,000
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Direct advertising
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187,000
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51,000
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72,000
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64,000
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General advertising
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45,000
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10,800
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18,000
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16,200
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Store rent
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300,000
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85,000
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120,000
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95,000
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Depreciation of store fixtures
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16,000
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4,600
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6,000
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5,400
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Delivery salaries
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21,000
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7,000
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7,000
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7,000
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Depreciation of delivery equipment
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9,000
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3,000
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3,000
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3,000
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Total selling expenses
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817,000
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231,400
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315,000
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270,600
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Administrative expenses:
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Store management salaries
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70,000
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21,000
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30,000
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19,000
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General office salaries
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50,000
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12,000
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20,000
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18,000
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Insurance on fixtures and inventory
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25,000
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7,500
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9,000
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8,500
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Utilities
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106,000
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31,000
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40,000
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35,000
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Employment taxes
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57,000
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16,500
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21,900
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18,600
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General office - other
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75,000
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18,000
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30,000
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27,000
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Total administrative expenses
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383,000
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106,000
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150,900
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126,100
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Total expenses
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1,200,000
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337,400
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465,900
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396,700
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Net operating income (loss)
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$142,800
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$(20,600)
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$74,100
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$89,300
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Additional Data:
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Manager's salary per quarter
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$12,000
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New employee's salary per quarter
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$11,000
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Employment tax as a percentage of salaries
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15%
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Delivery person's salary per quarter
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$4,000
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Insurance related to downtown fixtures
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1/3
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Discharged employee's salary per quarter
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$6,000
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Assumed sales transferred to East store
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25%
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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 retained 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 is as follows:
b. The lease on the building housing the North Store can be broken with no penalty.
c. The store fixtures being used in the North Store would be retained and transferred to the other stores if the North Store were closed.
d. One of the store managers 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. The general manager of the North Store would be retained at her normal salary of $12,000 per quarter. All other employees and managers would be discharged.
e. 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 $4,000 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.
f. The company's employment taxes are 15% of salaries.
g. One-third of the insurance in the North Store is on the store's fixtures which will be transferred to the other stores along with the fixtures.
h. The "General office salaries" 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 salary is $6,000 per quarter.
i. General office-other also relates to the overall operation of Superior Markets, Inc., and will be allocated to the other stores if North Store is closed.
Required: Prepare a schedule showing the change in revenues and expenses and the impact on the company's overall net income that would result if the North Store were closed. What is your recommendation?