Problem 12-26 Close or Retain a Store [LO12-2 Superior Markets, Inc., operates t

Question

Problem 12-26 Close or Retain a Store [LO12-2 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 38 South North Store Store $4,68e,90e $928,808 $1,84,88 $1,848,888 Cost of goods sold Gross margin Selling and administrative expenses 2,53e,900 565,800 355,888 953, 1,812,800 887,8e8 2,878,8e8 828,008 278,688 166,188 444,788 (14,488) 389,188 $383,388 Selling expenses Administrative expenses 849,888 247,488 463.8e 122.aee 369,488 323,8e8 174,988 497,988 Total expenses Net operating income (loss) 1,312,8e8 $ 758, The North Store has consistently shown losses over the past two years. For this reason, management is glving 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 that are shown above is as follows: North Store South Store Store Selling expenses Sales salaries Direct advertising General advertising Store rent Depreciation of store fixtures Delivery salaries Depreciation of delivery $238,48 62,288 68,688 99,688 26,888 27,688 85,888 118,888 182,88e 1e,200 67,8e8 13,888 88,808 27,688 181,888 69,8e8 305,808 24,980 25,808 13,888 4,688 Total selling expenses $849,88 $247,488 323,808 $278,688 Allocated on the basis of sales dollars. North Store South Store Store Administrative expenses: $ 94,8e 29,808 38,888 27,888 27,688 Store managers salaries General office salaries Insurance on fixtures and inventory Utilities Employment taxes General office-other 69,8e8 41,888 81,128 62,888 115,8e8 27,688 17,8e8 13,888 12,3e0 26,860 17,848 23,8e8 24,428 46,8e8 $463,88 $122,e8 $174,9e8 $166,188 21,428 46,8e8 Total administrative expenses Allocated on the basis of sales dollars.

Explanation / Answer

Part 1 - Total salary that can be avoided if North store is closed.

Data for quarter ended 30th september 2017

Store management salary (Relevant gain)

($29000 - $13800)

Part 2 Employment taxes avoided

Part 3 Financial advantage/Disadvantage of shutting down North store

Costs which are allocated are not avoidable since these costs fully absorbed.

As per analysis, North store should not be closed. If store is closed then income of company as a whole would be reduced by $49835

Part 4 - If office space cant not be subleased then rent cosr of north store could not be avoided and in such cases total effect on income would be ($49835 + $85000 = $134835)

hence Total income would be reduced by $134835

decision = Store should not be closed

Part -5 = Advantage/Disadvantage of closing north store

Less : Gross margin gain from east store

($920000 * 1/4) * (828000/1840000 *100)

Less : Costs avoided on closing north stors

($8200 + $102700 + $15405 + $67000 + $85000 + $26860)

Particulars Amount Sales salary (Relevant gain) $62200 Delivery salary (Relevant gain) $5600

Store management salary (Relevant gain)

($29000 - $13800)

$15200 Salary of new Manager (Relevant gain) $12800 General Office compensation (relevant gain) $6900 Total salary avoided $102700

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