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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

$3,016,000  

$714,000   

$1,212,000  

 $1,090,000  

  Cost of goods sold

1,690,200  

394,000   

664,000  

 632,200  

  Gross margin

1,325,800  

320,000   

548,000  

 457,800  

  Selling and administrative expenses:

 

 

 

 

      Selling expenses

762,300  

229,700   

284,900  

 247,700  

      Administrative expenses

348,400  

100,700   

128,900  

 118,800  

  Total expenses

1,110,700  

330,400   

413,800  

 366,500  

  Net operating income (loss)

$215,100  

$(10,400)  

$134,200  

$91,300  

 

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  

$74,000   

$81,000   

$80,000   

     Direct advertising

189,000  

58,000   

69,000   

62,000   

     General advertising*

40,200  

9,500   

16,300   

14,400   

     Store rent

260,000  

77,000   

105,000   

78,000   

     Depreciation of store fixtures

14,600  

4,100   

5,500   

5,000   

     Delivery salaries

18,100  

5,600   

7,000   

5,500   

     Depreciation of delivery
equipment

5,400  

1,500   

1,100   

2,800   

  Total selling expenses

$762,300  

$229,700   

$284,900   

$247,700   

 

*Allocated on the basis of sales dollars.

 

 

Total

North
Store

South
Store

East
Store

  Administrative expenses:

 

 

 

 

     Store management salaries

$66,200  

$20,600   

$28,300   

$17,300   

     General office salaries*

46,300  

10,300   

18,800   

17,200   

     Insurance on fixtures and
inventory

20,800  

6,600   

7,200   

7,000   

     Utilities

87,800  

30,600   

24,000   

33,200   

     Employment taxes

53,300  

15,000   

20,700   

17,600   

     General office—other*

74,000  

17,600   

29,900   

26,500   

  Total administrative expenses

$348,400  

$100,700   

$128,900   

$118,800   

 

*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 $11,500 per
quarter. The general manager of the North Store would be retained
at her normal salary of $10,300 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 $3,800 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 19% 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 $5,500 per quarter.

 

Requirement 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. (Enter all
amounts as positive values. Omit the “$” sign in your
response.)

 
 

Requirement 2:

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

 

 

 

Requirement 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. Compute
the net effect of these factors. (Omit the “$” sign in your
response.)

 
 

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