Segmented Absorption Costing Income Statement Assignment | Top Universities

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
For the Quarter Ended September 30
Total North
Sales $ 4,900,000 $ 980,000 $ 1,960,000 $ 1,960,000
Cost of goods sold 2,695,000 620,000 997,000 1,078,000
Gross margin 2,205,000 360,000 963,000 882,000
Selling and administrative expenses:
Selling expenses 855,000 250,400 324,500 280,100
Administrative expenses 478,000 125,000 179,400 173,600
Total expenses 1,333,000 375,400 503,900 453,700
Net operating income (loss) $ 872,000 $ (15,400 ) $ 459,100 $ 428,300

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:

  1. The breakdown of the selling and administrative expenses that are shown above is as follows:

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Total North
Selling expenses:
Sales salaries $ 252,600 $ 65,400 $ 75,400 $ 111,800
Direct advertising 184,000 70,000 91,000 23,000
General advertising* 73,500 14,700 29,400 29,400
Store rent 278,000 80,000 107,000 91,000
Depreciation of store fixtures 25,500 6,500 7,900 11,100
Delivery salaries 26,700 8,900 8,900 8,900
Depreciation of delivery
14,700 4,900 4,900 4,900
Total selling expenses $ 855,000 $ 250,400 $ 324,500 $ 280,100

*Allocated on the basis of sales dollars.

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Total North
Administrative expenses:
Store managers' salaries $ 98,500 $ 30,500 $ 39,500 $ 28,500
General office salaries* 73,500 14,800 29,400 29,300
Insurance on fixtures and inventory 44,000 13,200 18,500 12,300
Utilities 71,805 24,060 20,020 27,725
Employment taxes 67,695 17,940 22,980 26,775
General office—other* 122,500 24,500 49,000 49,000
Total administrative expenses $ 478,000 $ 125,000 $ 179,400 $ 173,600

*Allocated on the basis of sales dollars.

  1. The lease on the building housing the North Store can be broken with no penalty.
  2. The fixtures being used in the North Store would be transferred to the other two stores if the North Store were closed.
  3. 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 $13,800 per quarter. The general manager of the North Store would continue to earn her normal salary of $14,800 per quarter. All other managers and employees in the North store would be discharged.
  4. 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 $5,900 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.
  5. The company pays employment taxes equal to 15% of their employees' salaries.
  6. One-third of the insurance in the North Store is on the store’s fixtures.
  7. 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 $7,400 per quarter.


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 Store's floor space can’t be subleased, would you recommend closing the North Store?

5. Assume that the North Store's floor space can’t be subleased. However, let's 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? Get Accounting Homework Help Today.

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