Score: 40/40 Points 100 %

7. Award: 5 out of 5.00 points

Problem 12-26 Close or Retain a Store [LO12-2]

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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:

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Superior Markets, Inc.
Income Statement

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For the Quarter Ended September 30
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Total Store Store Store
Sales $4,800,000 $ 960,000 $1,920,000 $1,920,000
Cost of goods sold 2,640,000 600,000 984,000 1,056,000
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Gross margin 2,160,000 360,000 936,000 864,000

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Selling and administrative expenses:

Selling expenses: 853,000 249,400 324,000 279,600
Administrative expenses 473,000 124,000 177,900 171,100
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Total expenses 1,326,000 373,400 501,900 450,700

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Net operating income (loss) $ 834,000 $ (13,400) $ 434,100 $ 413,300

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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:

North South East

Total Store Store Store
Selling expenses:
Sales salaries $ 246,200 $ 59,000 $ 77,800 $ 109,400
Direct advertising 183,000 69,000 90,000 24,000
General advertising* 72,000 14,400 28,800 28,800
Store rent 286,000 87,000 106,000 93,000
Depreciation of store fixtures 25,000 6,400 7,800 10,800
Delivery salaries 26,400 8,800 8,800 8,800
https://www.coursehero.com/file/23629028/acct12-26/
 Depreciation of delivery equipment 14,400 4,800 4,800 4,800

Total selling expenses $ 853,000 $ 249,400 $ 324,000 $ 279,600

*Allocated on the basis of sales dollars.

North South East

Total Store Store Store
Administrative expenses:
Store management salaries $ 97,000 $ 30,000 $ 39,000 $ 28,000
General office salaries* 72,000 14,400 28,800 28,800
Insurance on fixtures and inventory 43,000 12,900 18,000 12,100
Utilities 74,760 25,870 20,940 27,950
Employment taxes 66,240 16,830 23,160 26,250
General office —other* 120,000 24,000 48,000 48,000

Total administrative expenses $ 473,000 $ 124,000 $ 177,900 $ 171,100

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*Allocated on the basis of sales dollars.

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b. The lease on the building housing the North Store can be broken with no penalty.

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c. The fixtures being used in the North Store would be transferred to the other two stores if the North Store

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were closed.

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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
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hiring a new employee at a salary of $13,400 per quarter. The general manager of the North Store would
be retained at her normal salary of $14,400 per quarter. All other employees in the store would be
discharged.
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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 $5,800 per quarter. The delivery
aC s

equipment would be distributed to the other stores. The equipment does not wear out through use, but
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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
ed d

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 $7,200 per quarter.
ar stu

Required:
1. Prepare a schedule showing the change in revenues and expenses and the impact on the company’s
sh is

overall net operating income that would result if the North Store were closed. (Any losses/ reductions
should be indicated by a minus sign.)
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https://www.coursehero.com/file/23629028/acct12-26/
 Gross margin lost if the store is closed $ (360,000)

Costs that can be avoided:

Sales salaries $ 59,000
Direct advertising 69,000
Store rent 87,000
Delivery salaries 5,800
Store management salaries 15,600
Salary of new manager 13,400
General office compensation 7,200
Insurance on inventories 8,600
Utilities 25,870

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Employment taxes 15,150

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Total costs that can be avoided 306,620
$ (53,380)

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Decrease in company profits if the North Store is closed

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

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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
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Store, due to strong customer loyalty to Superior Markets. The East Store has enough capacity to
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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.
sh is

a. Calculate the net advantage of closing the North Store. (Any reductions or outflows should be
indicated by a minus sign.)
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Gross margin lost if the North Store is closed $ (360,000)

Gross margin gained from the East Store 108,000
Net operating (loss) in gross margin (252,000)
Less costs that can be avoided if the North Store is closed 306,620
Net advantage (disadvantage) of closing the North store $ 54,620

https://www.coursehero.com/file/23629028/acct12-26/
 b. What recommendation would you make to the management of Superior Markets, Inc.?

The North Store should be closed.

rev: 09_13_2014_QC_52212, 10_16_2014_QC_52212, 10_24_2014_QC_52212,
05_27_2016_QC_CS-52570
Garrison 15e Recheck 2015-01-16

References

Expanded table Problem 12-26 Close Learning Objective: 12-02 Prepare an

or Retain a Store analysis showing whether a product line or
[LO12-2] other business segment should be added
or dropped.

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Problem 12-26 Close or Retain a Store [LO12-2]

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rs e
Superior Markets, Inc., operates three stores in a large metropolitan area. A segmented absorption costing
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income statement for the company for the last quarter is given below:

Superior Markets, Inc.

Income Statement
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For the Quarter Ended September 30

aC s

North South East

vi y re

Total Store Store Store

Sales $4,800,000 $ 960,000 $1,920,000 $1,920,000
Cost of goods sold 2,640,000 600,000 984,000 1,056,000
ed d

Gross margin 2,160,000 360,000 936,000 864,000

ar stu

Selling and administrative expenses:

Selling expenses: 853,000 249,400 324,000 279,600
Administrative expenses 473,000 124,000 177,900 171,100
sh is

Total expenses 1,326,000 373,400 501,900 450,700

Th

Net operating income (loss) $ 834,000 $ (13,400) $ 434,100 $ 413,300

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:

North South East

Total Store Store Store
Selling expenses:
https://www.coursehero.com/file/23629028/acct12-26/
 Sales salaries $ 246,200 $ 59,000 $ 77,800 $ 109,400
Direct advertising 183,000 69,000 90,000 24,000
General advertising* 72,000 14,400 28,800 28,800
Store rent 286,000 87,000 106,000 93,000
Depreciation of store fixtures 25,000 6,400 7,800 10,800
Delivery salaries 26,400 8,800 8,800 8,800
Depreciation of delivery equipment 14,400 4,800 4,800 4,800

Total selling expenses $ 853,000 $ 249,400 $ 324,000 $ 279,600

*Allocated on the basis of sales dollars.

North South East

Total Store Store Store
Administrative expenses:
Store management salaries $ 97,000 $ 30,000 $ 39,000 $ 28,000
General office salaries* 72,000 14,400 28,800 28,800
Insurance on fixtures and inventory 43,000 12,900 18,000 12,100
Utilities 74,760 25,870 20,940 27,950
Employment taxes 66,240 16,830 23,160 26,250

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General office —other* 120,000 24,000 48,000 48,000

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Total administrative expenses $ 473,000 $ 124,000 $ 177,900 $ 171,100

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*Allocated on the basis of sales dollars.
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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
o

were closed.
d. The general manager of the North Store would be retained and transferred to another position in the
aC s

company if the North Store were closed. She would be filling a position that would otherwise be filled by
vi y re

hiring a new employee at a salary of $13,400 per quarter. The general manager of the North Store would
be retained at her normal salary of $14,400 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
ed d

discharged if the North Store were closed. This person’s salary is $5,800 per quarter. The delivery
equipment would be distributed to the other stores. The equipment does not wear out through use, but
ar stu

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
sh is

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 $7,200 per quarter.
Th

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.)

https://www.coursehero.com/file/23629028/acct12-26/
 Gross margin lost if the store is closed $ (360,000)

Costs that can be avoided:

Sales salaries $ 59,000
Direct advertising 69,000
Store rent 87,000
Delivery salaries 5,800
Store management salaries 15,600
Salary of new manager 13,400
General office compensation 7,200
Insurance on inventories 8,600
Utilities 25,870

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Employment taxes 15,150

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Total costs that can be avoided 306,620

o.
Decrease in company profits if the North Store is closed $ (53,380)

rs e
ou urc
o

2. Based on your computations in (1) above, what recommendation would you make to the management of
aC s

Superior Markets, Inc.?

vi y re

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
ed d

Store, due to strong customer loyalty to Superior Markets. The East Store has enough capacity to
ar stu

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.
sh is

a. Calculate the net advantage of closing the North Store. (Any reductions or outflows should be
indicated by a minus sign.)
Th

Gross margin lost if the North Store is closed $ (360,000)

Gross margin gained from the East Store 108,000
Net operating (loss) in gross margin (252,000)
Less costs that can be avoided if the North Store is closed 306,620
Net advantage (disadvantage) of closing the North store $ 54,620

https://www.coursehero.com/file/23629028/acct12-26/
 b. What recommendation would you make to the management of Superior Markets, Inc.?

The North Store should be closed.

rev: 09_13_2014_QC_52212, 10_16_2014_QC_52212, 10_24_2014_QC_52212,
05_27_2016_QC_CS-52570
Garrison 15e Recheck 2015-01-16

Explanation:

1.
Store management salaries ($30,000 – $14,400) = $15,600
Insurance on inventories = ($12,900 × 2/3) = $8,600

Employment taxes:

Salaries avoided by closing the store:

Sales salaries $ 59,000
Delivery salaries 5,800

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Store management salaries 15,600

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Salary of new manager 13,400

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General office compensation 7,200

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Total avoided 101,000

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Employment tax rate × 15%

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Employment taxes avoided $ 15,150
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Alternative Solution:
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Difference: Net
Operating Income
North Store Kept North Store Increase or
Open Closed (Decrease)
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Sales $ 960,000 $ 0 $ (960,000)

Cost of goods sold 600,000 0 600,000
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Gross margin 360,000 0 (360,000)

Selling and administrative expenses:

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Selling expenses:
Sales salaries 59,000 0 59,000
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Direct advertising 69,000 0 69,000

General advertising 14,400 14,400 0
Store rent 87,000 0 87,000
Depreciation of store fixtures 6,400 6,400 0
Delivery salaries 8,800 3,000 5,800
Depreciation of delivery equipment 4,800 4,800 0

Total selling expenses 249,400 28,600 220,800

Administrative expenses:
Store management salaries 30,000 14,400 15,600
Salary of new manager 13,400 0 13,400
General office compensation 14,400 7,200 7,200
Insurance on fixtures and inventory 12,900 4,300 8,600
Utilities 25,870 0 25,870
Employment taxes 18,840 3,690 15,150
https://www.coursehero.com/file/23629028/acct12-26/
 General office—other* 24,000 24,000 0

Total administrative expenses 139,410 53,590 85,820

Total operating expenses 388,810 82,190 306,620

Net operating income (loss) $ (28,810) $ (82,190) $ (53,380)

2.
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 $53,380 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 $87,000 rent cannot be avoided and the North Store is closed, the
company’s overall net operating income would be reduced by $140,380 per quarter ($53,380 + $87,000).

3.
The North Store should be closed if $240,000 of its sales are picked up by the East Store Store. The net
effect of the closure will be an increase in overall company net operating income by $54,620 per quarter:

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Gross margin gained at the East Store: $960,000 × 1/4 = $240,000; $240,000 × 45%* = $108,000

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*The East Store’s gross margin percentage is: $864,000 ÷ $1,920,000 = 45%

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https://www.coursehero.com/file/23629028/acct12-26/

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