Problem
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
|
$
|
3,000,000
|
|
$
|
720,000
|
|
$
|
1,200,000
|
|
$
|
1,080,000
|
|
|
Cost of goods sold
|
|
1,657,200
|
|
|
403,200
|
|
|
660,000
|
|
|
594,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
1,342,800
|
|
|
316,800
|
|
|
540,000
|
|
|
486,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and administrative expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling expenses:
|
|
817,000
|
|
|
231,400
|
|
|
315,000
|
|
|
270,600
|
|
|
Administrative expenses
|
|
383,000
|
|
|
106,000
|
|
|
150,900
|
|
|
126,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
1,200,000
|
|
|
337,400
|
|
|
465,900
|
|
|
396,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income (loss)
|
$
|
142,800
|
|
$
|
(20,600
|
)
|
$
|
74,100
|
|
$
|
89,300
|
|
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 is as follows:
|
Total
|
North
Store
|
South
Store
|
East
Store
|
|
Selling expenses:
|
|
|
|
|
|
|
|
|
|
Sales salaries
|
$
|
239,000
|
$
|
70,000
|
$
|
89,000
|
$
|
80,000
|
|
Direct advertising
|
|
187,000
|
|
51,000
|
|
72,000
|
|
64,000
|
|
General advertising*
|
|
45,000
|
|
10,800
|
|
18,000
|
|
16,200
|
|
Store rent
|
|
300,000
|
|
85,000
|
|
120,000
|
|
95,000
|
|
Depreciation of store fixtures
|
|
16,000
|
|
4,600
|
|
6,000
|
|
5,400
|
|
Delivery salaries
|
|
21,000
|
|
7,000
|
|
7,000
|
|
7,000
|
|
Depreciation of delivery equipment
|
|
9,000
|
|
3,000
|
|
3,000
|
|
3,000
|
|
Total selling expenses
|
$
|
817,000
|
$
|
231,400
|
$
|
315,000
|
$
|
270,600
|
*Allocated on the basis of sales dollars.
|
Total
|
North
Store
|
South
Store
|
East
Store
|
|
Administrative expenses:
|
|
|
|
|
|
|
|
|
|
Store management salaries
|
$
|
70,000
|
$
|
21,000
|
$
|
30,000
|
$
|
19,000
|
|
General office salaries*
|
|
50,000
|
|
12,000
|
|
20,000
|
|
18,000
|
|
Insurance on fixtures and inventory
|
|
25,000
|
|
7,500
|
|
9,000
|
|
8,500
|
|
Utilities
|
|
106,000
|
|
31,000
|
|
40,000
|
|
35,000
|
|
Employment taxes
|
|
57,000
|
|
16,500
|
|
21,900
|
|
18,600
|
|
General office -other*
|
|
75,000
|
|
18,000
|
|
30,000
|
|
27,000
|
|
Total administrative expenses
|
$
|
383,000
|
$
|
106,000
|
$
|
150,900
|
$
|
126,100
|
*Allocated on the basis of sales dollars.
b. The lease on the building housing the North Store can be broken with no penalty.
c. The fixtures being used in the North Store would be transferred to the other two stores if the North Store were closed.
d. 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 $11,000 per quarter. The general manager of the North Store would be retained at her normal salary of $12,000 per quarter. All other employees in the store 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.
h. 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 $6,000 per quarter.
Required:
1. Prepare a schedule showing the change in revenues and expenses and the impact on the company's overall net operating income that would result if the North Store were closed.
2. Based on your computations in (1) above, what recommendation would you make to the management of Superior Markets, Inc.?
3. Assume that if the North Store were closed, at least one-fourth of its sales would transfer to the East Store, due to strong customer loyalty to Superior Markets. The East Store has enough capacity to handle the increased sales. You may assume that the increased sales in the East Store would yield the same gross margin as a percentage of sales as present sales in that store.
a. Calculate the net advantage of closing the North Store.
b. What recommendation would you make to the management of Superior Markets, Inc.?