Problem 12-26 Close or Retain a Store [LO12-2 Superior Markets, Inc., operates t
ID: 2571799 • Letter: P
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 ncr re60000 For the Quarter Ended September 30 North East store South Total Store Store $4,100,000 $860,000 $1,640,000 $1, 600, 000 Sales Cost of goods sold Gross margin Selling and administrative expenses: 2,255, 000 515,000 860,000880, 000 1,845, 000 345,000 780, 000720,000 Selling expenses Administrative expenses 839,000 242, 400 320, 500 276,100 438, 000 117,000 167,400 153, 600 1,277, 000 359,400 487, 900 429, 700 568,000 (14,400) $ 292,100 $ 290,300 Total expenses Net operating income (loss)Explanation / Answer
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1 The simplest approach to the solution is: Gross margin lost if the store is closed ($345,000) Costs that can be avoided: Sales salaries 69,600 Direct advertising 62,000 Store rent 80,000 Delivery salaries 5,100 Store management salaries ($26,500 – $13,000) 13,500 Salary of new manager 12,000 General office compensation 6,500 Insurance on inventories ($10,800 × 2/3) 7,200 Utilities 27,620 Employment taxes* $ 16,005 299,525 Decrease in company profits if the NorthStore is closed (45,475) ans part 3 *Salaries avoided by closing the store: Sales salaries 69,600 Delivery salaries 5,100 Store management salaries 13,500 Salary of new manager 12,000 General office compensation 6,500 Total avoided 106,700 Ans part 1 Employment tax rate x 15% Employment taxes avoided $ 16,005 Ans Part 2 4 Based on the data in (1), the North Store should not be closed. If the store is closed, then the company’s overall net operating income will decrease by $45,475 per quarter. If the store space cannot be subleased or the lease broken without penalty, a decision to close the store would cause an even greater decline in the company’s overall net income. If the $80,000 rent cannot be avoided and the North Store is closed, the company’s overall net operating income would be reduced by $125,475 per quarter ($45,475 + $80,000). 5 Under these circumstances, the North Store should be closed. The
computations are as follows: Gross margin lost if the North Store is closed (part 1) ($345,000) Gross margin gained from the East Store:
$860,000 × 1/4 = $215,000; $215,000 × 45%* = $96,750 96,750 Net operating loss in gross margin ($248,250) Less costs that can be avoided if the North Store is
closed (part 1) 299,525 Net advantage of closing the North Store $51,275 *The East Store’s gross margin percentage is:
$720,000 ÷ $1,600,000 = 45%