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:
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 $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 managers' 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.
1. The lease on the building housing the North Store can be broken with no penalty.
2. The fixtures being used in the North Store would be transferred to the other two stores if the North Store were closed.
3. 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 continue to earn her normal salary of $12,000 per quarter. All other managers and employees in the North store would be discharged.
4. 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.
5. The company pays employment taxes equal to 15% of their employees' salaries.
6. One-third of the insurance in the North Store is on the store’s fixtures.
7. 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. How much employee salaries will the company avoid if it closes the North Store?
2. How much employment taxes will the company avoid if it closes the North Store?
3. What is the financial advantage (disadvantage) of closing the North Store?
4. Assuming that the North Store's floor space can’t be subleased, would you recommend closing the North Store?
5. Assume that the North Store's floor space can’t be subleased. However, let's introduce three more assumptions. First, assume that if the North Store were closed, one-fourth of its sales would transfer to the East Store, due to strong customer loyalty to Superior Markets. Second, assume that the East Store has enough capacity to handle the increased sales that would arise from closing the North Store. Third, assume that the increased sales in the East Store would yield the same gross margin as a percentage of sales as present sales in the East store. Given these new assumptions, what is the financial advantage (disadvantage) of closing the North Store?