Reference no: EM131811793

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 $ 3,600,000 $ 800,000 $ 1,440,000 $ 1,360,000 Cost of goods sold 1,980,000 470,000 762,000 748,000 Gross margin 1,620,000 330,000 678,000 612,000 Selling and administrative expenses: Selling expenses: 829,000 237,400 318,000 273,600 Administrative expenses 413,000 112,000 159,900 141,100 Total expenses 1,242,000 349,400 477,900 414,700 Net operating income (loss) $ 378,000 $ (19,400 ) $ 200,100 $ 197,300 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 $ 221,400 $ 61,000 $ 74,600 $ 85,800 Direct advertising 171,000 57,000 78,000 36,000 General advertising* 54,000 12,000 21,600 20,400 Store rent 330,000 91,000 126,000 113,000 Depreciation of store fixtures 19,000 5,200 6,600 7,200 Delivery salaries 22,800 7,600 7,600 7,600 Depreciation of delivery equipment 10,800 3,600 3,600 3,600 Total selling expenses $ 829,000 $ 237,400 $ 318,000 $ 273,600 *Allocated on the basis of sales dollars. Total North Store South Store East Store Administrative expenses: Store management salaries $ 79,000 $ 24,000 $ 33,000 $ 22,000 General office salaries* 54,000 12,000 21,600 20,400 Insurance on fixtures and inventory 31,000 9,300 12,000 9,700 Utilities 102,420 31,010 36,780 34,630 Employment taxes 56,580 15,690 20,520 20,370 General office -other* 90,000 20,000 36,000 34,000 Total administrative expenses $ 413,000 $ 112,000 $ 159,900 $ 141,100 *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 $4,600 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. (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.)