Breakdown of the selling and administrative expenses

Reference no: EM131763150

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	$	4,000,000	$	840,000		$	1,600,000	$	1,560,000
Cost of goods sold		2,200,000		495,000			847,000		858,000
Gross margin		1,800,000		345,000			753,000		702,000
Selling and administrative expenses:
Selling expenses:		837,000		241,400			320,000		275,600
Administrative expenses		433,000		116,000			165,900		151,100
Total expenses		1,270,000		357,400			485,900		426,700
Net operating income (loss)	$	530,000	$	(12,400	)	$	267,100	$	275,300

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	$	235,000	$	55,200	$	83,000	$	96,800
Direct advertising		175,000		61,000		82,000		32,000
General advertising*		60,000		12,600		24,000		23,400
Store rent		310,000		95,000		112,000		103,000
Depreciation of store fixtures		21,000		5,600		7,000		8,400
Delivery salaries		24,000		8,000		8,000		8,000
Depreciation of delivery equipment		12,000		4,000		4,000		4,000
Total selling expenses	$	837,000	$	241,400	$	320,000	$	275,600

*Allocated on the basis of sales dollars.

	Total		North Store		South Store		East Store
Administrative expenses:
Store management salaries	$	85,000	$	26,000	$	35,000	$	24,000
General office salaries*		60,000		12,600		24,000		23,400
Insurance on fixtures and inventory		35,000		10,500		14,000		10,500
Utilities		92,400		30,630		30,400		31,370
Employment taxes		60,600		15,270		22,500		22,830
General office â€"other*		100,000		21,000		40,000		39,000
Total administrative expenses	$	433,000	$	116,000	$	165,900	$	151,100

*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 $11,600 per quarter. The general manager of the North Store would be retained at her normal salary of $12,600 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 $5,000 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 â€œGeneral office salariesâ€ and â€œGeneral officeâ€"otherâ€ 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 $6,300 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.?

	The North Store should be closed.
	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 losses should be indicated by a minus sign.)

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

	The North Store should be closed.
	The North Store should not be closed

Reference no: EM131763150

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