Superior Markets, Inc., operates three stores in a large metropolitan area. A segmented...

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

Total North Store South Store East Store
Sales $3,300,000 $760,000 $1,320,000 $1,220,000
Cost of goods sold 1,815,000 433,000 711,000 671,000
Gross margin 1,485,000 327,000 609,000 549,000
Selling and administrative expenses:
Selling expenses: 823,000 234,400 316,500 272,100
Administrative expenses 398,000 109,000 155,400 133,600
Total expenses 1,221,000 343,400 471,900 405,700
Net operating income (loss) $264,000 $(16,400) $137,100 $143,300


The North Store has consistently shown losses over the past two years. For this reason, management is considering 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 $227,200 $65,500 $81,800 $79,900
Direct advertising 182,000 54,000 75,000 53,000
General advertising* 49,500 11,400 19,800 18,300
Store rent 315,000 88,000 123,000 104,000
Depreciation of store fixtures 17,500 4,900 6,300 6,300
Delivery salaries 21,900 7,300 7,300 7,300
Depreciation of delivery equipment 9,900 3,300 3,300 3,300
Total selling expenses $823,000 $234,400 $316,500 $272,100
  • Allocated based on sales dollars.

Total North Store South Store East Store
Administrative expenses:
Store management salaries $74,500 $22,500 $31,500 $20,500
General office salaries* 49,500 11,400 19,800 18,300
Insurance on fixtures and inventory 28,000 8,400 10,500 9,100
Utilities 107,535 31,695 39,540 36,300
Employment taxes 55,965 16,005 21,060 18,900
General office - other* 82,500 19,000 33,000 30,500
Total administrative expenses $398,000 $109,000 $155,400 $133,600
  • Allocated based on 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 $10,400 per quarter. The general manager of the North Store would be retained at her normal salary of $11,400 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 $4,300 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 Shore 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 $5,700 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. (Any losses/reductions should be indicated by a minus sign.)

2. Based on your computations in 1 above, what recommendation would you make to the management of Superior Markets, Inc.?

a. The North Store should be closed

b. The North Store should not be closed

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. (Any reductions or outflows should be indicated by a minus sign.)

Gross margin lost if the North Store is closed
Gross margin gained from the East Store
Net operating (loss)in gross margin
Less costs that can be avoided if the North Store is closed
Net advantage (disadvantage) of closing the North store

b. What recommendation would you make to the management of Superior Markets, Inc.?

a. The North Store should be closed

b. The North Store should not be closed

Relevant Costs: Closing Store:

All relevant costs that should be taken into consideration when calculating the financial effect that closing a store will have must be different between the alternatives on a company-wide level.

Answer and Explanation:

Superior Markets, Inc.

Schedule showing the overall financial impact of closing the Downtown Store (per quarter)

Loss of sales revenue $(760,000)
Saving in avoidable costs:
Cost of goods sold 433,000
Direct advertising 54,000
General advertising
unavoidable so not relevant
0
Sales salaries 65,500
Delivery salaries
only the avoidable portion is relevant
4,300
Store rent 88,000
Depreciation on fixtures and delivery equipment
unavoidable so not relevant
0
Store manager salary
New appointment that will be avoided
10,400
General office salaries
only the avoidable portion is relevant
5,700
Utilities 31,695
Insurance
66.67% will be avoided
2,352
Employment taxes
15% on avoidable salaries ($65,500 + $10,400 + $4,300 + $5,700 )
12,885
General office expenses - other
unavoidable so not relevant
0
Total avoidable cost $707,832
Net decrease in profit if the store is closed $(52,168)


2. I would recommend that the store is not closed, because closing it will lead to a decrease in profit.


3. a.) The impact would now be:

Loss of sales revenue $(760,000)
Saving in avoidable costs:
Cost of goods sold 433,000
Direct advertising 54,000
General advertising
unavoidable so not relevant
0
Sales salaries 65,500
Delivery salaries
only the avoidable portion is relevant
4,300
Store rent 88,000
Depreciation on fixtures and delivery equipment
unavoidable so not relevant
0
Store manager salary
New appointment that will be avoided
10,400
General office salaries
only the avoidable portion is relevant
5,700
Utilities 31,695
Insurance
66.67% will be avoided
2,352
Employment taxes
15% on avoidable salaries ($65,500 + $10,400 + $4,300 + $5,700 )
12,885
General office expenses - other
unavoidable so not relevant
0
Total avoidable cost $707,832
Opportunity cost
Additional gross margin East store
85,500
($760,000 / 4 = $190,00 x 0.45 ($549,000 / $1,220,00))
Net increase in profit if the store is closed $33,332


b.) I would now recommend that the store is closed.


Learn more about this topic:

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Relevant Costs in Eliminating a Product or Segment

from Accounting 301: Applied Managerial Accounting

Chapter 9 / Lesson 12
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