Textbook Title: Loose Leaf for Managerial Accounting

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Chapter 12, Problem 26P

Problem

Close or Retain a Store

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:

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 that are shown above is as follows:

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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 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 continue to earn her normal salary of $12,000 per quarter. All other managers and employees in the North store would be
discharged.

e. The company has one delivery crew that serves all three stores. One delivery person could be discharged ii the North Store were closed. This
persons salary is $4,000 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.

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 f. The company pays employment taxes equal to 15% of their employees salaries.

g. One-third of the insurance in the North Store is on the stores fixtures.

h. The General office salaries and General officeother 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 persons compensation is
$6,000 per quarter.

Required:

1. How much employee salaries will the company avoid if it closes the North Store?

2. How much employment taxes will the company avoid if it closes the North Store?

3. What is the financial advantage (disadvantage) of closing the North Store?

4. Assuming that the North Stores floor space cant be subleased, would you recommend closing the North Store?

5. Assume that the North Stores floor space cant be subleased. However, lets introduce three more assumptions. First, assume that if the
North Store were closed, one-fourth of its sales would transfer to the East Store, due to strong customer loyalty to Superior Markets. Second,
assume that the East Store has enough capacity to handle the increased sales that would arise from closing the North Store. Third, assume that the
increased sales in the East Store would yield the same gross margin as a percentage of sales as present sales in the East store. Given these new
assumptions, what is the financial advantage (disadvantage) of closing the North Store?

Step-by-step solution

1. Step 1 of 7

A firms decision making is said to be optimum when it could choose and adapt a best financial alternative among the available ones. Decision making
plays a vital role in sustainability and growth of firms.

All the decisions whichever firms use to take mostly will have a direct or an indirect monetary impact. Thus, as the decisions made reflect financial
transactions of company in one way or the other. Managers need to evaluate all the available alternatives well and analyze the outcomes of evaluation and

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 choose the best.

2. Step 2 of 7

1.

Given information:

Sales salaries- $70,000

Delivery Salaries- 4,000

Salary of new manager -$11,000

General office compensation-$6,000

Calculation of Store Manager Salaries:

Therefore, the cost reduction in store manager salary after north store closure is $9,000.

The following table shows the value of salaries avoided by closing north store:

Hence, the total cost that can be avoided, if the north store closed is $100,000.

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 3. Step 3 of 7

2.

Employment tax rate is 15%

Calculation of Avoided Employment Taxes:

With the substitution of given and evaluated values in the above equation, employment taxes avoided are as follows:

Therefore, the employment taxes that are avoided by closing north store are $15,000.

4. Step 4 of 7

3.

The following table shows the financial impact over firm after closing the North store:

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 Therefore, there is a disadvantage in closing the North store because the net loss is increased from $20,600 to $29,800.

5. Step 5 of 7

4.

Basing on the above calculations, the North Store must not be closed. If that store is closed, then the firms overall net operating income will get
declined by $29,800 per each quarter.

6. Step 6 of 7

If the store space cannot be subleased or the lease broken without penalty, the decision of closing the store would even cause a great decline of the
firms overall net income. If the rent of north store $85,000 that cannot be avoided and if the store is closed, then the firms overall net operating
income would be get declined by $114,800 per each quarter ($29,800 + $85,000).

Hence, it is not recommended to close the North store.

7. Step 7 of 7

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 5.

Given are three assumptions:

(i) North store will be closed and one-fourth of sales are transferred to east store.

(ii) East store capacity is enough to handle increased sale impacted with closure of north store.

(iii) East store increased sales also would yield same gross margin.

Following table shows the financial impact over firm with closure of northern store:

Note:

The east store gross margin is 45% before closing north store hence that is taken same for calculating gross margin gain of east store after closing north
store.

Therefore, the given three assumptions are indicating a financial advantage of $51,200 to the firm by closing north store, thus, the store can be closed in
that circumstances.

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