1. 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 30
	Total	North Store	South Store	East Store
Sales	$	4,000,000		$	840,000		$	1,600,000		$	1,560,000
Cost of goods sold		2,200,000			495,000			847,000			858,000
Gross margin		1,800,000			345,000			753,000			702,000
Selling and administrative expenses:
Selling expenses		837,000			241,400			320,000			275,600
Administrative expenses		433,000			116,000			165,900			151,100
Total expenses		1,270,000			357,400			485,900			426,700
Net operating income (loss)	$	530,000		$	(12,400	)	$	267,100		$	275,300

 

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 that are shown above is as follows:

 

	Total	North Store	South Store	East Store
Selling expenses:
Sales salaries	$	235,000	$	55,200	$	83,000	$	96,800
Direct advertising		175,000		61,000		82,000		32,000
General advertising*		60,000		12,600		24,000		23,400
Store rent		310,000		95,000		112,000		103,000
Depreciation of store fixtures		21,000		5,600		7,000		8,400
Delivery salaries		24,000		8,000		8,000		8,000
Depreciation of delivery equipment		12,000		4,000		4,000		4,000
Total selling expenses	$	837,000	$	241,400	$	320,000	$	275,600

*Allocated on the basis of sales dollars.

 

	Total	North Store	South Store	East Store
Administrative expenses:
Store managers’ salaries	$	85,000	$	26,000	$	35,000	$	24,000
General office salaries*		60,000		12,600		24,000		23,400
Insurance on fixtures and inventory		35,000		10,500		14,000		10,500
Utilities		92,400		30,630		30,400		31,370
Employment taxes		60,600		15,270		22,500		22,830
General office—other*		100,000		21,000		40,000		39,000
Total administrative expenses	$	433,000	$	116,000	$	165,900	$	151,100

*Allocated on the basis of sales dollars.

 

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

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

1. 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 $11,600 per quarter. The general manager of the North Store would continue to earn her normal salary of $12,600 per quarter. All other managers and employees in the North store would be discharged.

1. 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 $5,000 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.

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

1. One-third of the insurance in the North Store is on the store’s fixtures.

1. 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 $6,300 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 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?

 

2. Come-Clean Corporation produces a variety of cleaning compounds and solutions for both industrial and household use. While most of its products are processed independently, a few are related, such as the company’s Grit 337 and its Sparkle silver polish.

 

Grit 337 is a coarse cleaning powder with many industrial uses. It costs $1.60 a pound to make, and it has a selling price of $3.40 a pound. A small portion of the annual production of Grit 337 is retained in the factory for further processing. It is combined with several other ingredients to form a paste that is marketed as Sparkle silver polish. The silver polish sells for $4.00 per jar.

 

This further processing requires one-fourth pound of Grit 337 per jar of silver polish. The additional direct variable costs involved in the processing of a jar of silver polish are:

 

Other ingredients	$	0.55
Direct labor		1.44
Total direct cost	$	1.99

 

Overhead costs associated with processing the silver polish are:

Variable manufacturing overhead cost		25	% of direct labor cost
Fixed manufacturing overhead cost (per month)
Production supervisor	$	3,100
Depreciation of mixing equipment	$	1,500

 

The production supervisor has no duties other than to oversee production of the silver polish. The mixing equipment is special-purpose equipment acquired specifically to produce the silver polish. It can produce up to 3,000 jars of polish per month. Its resale value is negligible and it does not wear out through use.

 

Advertising costs for the silver polish total $2,900 per month. Variable selling costs associated with the silver polish are 5% of sales.

 

Due to a recent decline in the demand for silver polish, the company is wondering whether its continued production is advisable. The sales manager feels that it would be more profitable to sell all of the Grit 337 as a cleaning powder.

 

Required:

1. How much incremental revenue does the company earn per jar of polish by further processing Grit 337 rather than selling it as a cleaning powder? (Round your answer to 2 decimal places.)

2. How much incremental contribution margin does the company earn per jar of polish by further processing Grit 337 rather than selling it as a cleaning powder? (Round your intermediate calculations and final answer to 2 decimal places.)

3. How many jars of silver polish must be sold each month to exactly offset the avoidable fixed costs incurred to produce and sell the polish? (Round your intermediate calculations to 2 decimal places.)

4. If the company sells 8,900 jars of polish, what is the financial advantage (disadvantage) of choosing to further process Grit 337 rather than selling is as a cleaning powder? (Enter any “disadvantages” as a negative value.  Round your intermediate calculations to 2 decimal places.)

5. If the company sells 10,800 jars of polish, what is the financial advantage (disadvantage) of choosing to further process Grit 337 rather than selling is as a cleaning powder? (Enter any “disadvantages” as a negative value.  Round your intermediate calculations to 2 decimal places.)

 

3. “In my opinion, we ought to stop making our own drums and accept that outside supplier’s offer,” said Wim Niewindt, managing director of Antilles Refining, N.V., of Aruba. “At a price of $21 per drum, we would be paying $6.25 less than it costs us to manufacture the drums in our own plant. Since we use 75,000 drums a year, that would be an annual cost savings of $468,750.” Antilles Refining’s current cost to manufacture one drum is given below (based on 75,000 drums per year):

 

Direct materials	$	10.65
Direct labor		9.00
Variable overhead		1.60
Fixed overhead ($3.40 general company overhead, $1.90 depreciation, and, $0.70 supervision)		6.00
Total cost per drum	$	27.25

 

A decision about whether to make or buy the drums is especially important at this time because the equipment being used to make the drums is completely worn out and must be replaced. The choices facing the company are:

Alternative 1: Rent new equipment and continue to make the drums. The equipment would be rented for $157,500 per year.

 

Alternative 2: Purchase the drums from an outside supplier at $21 per drum.

 

The new equipment would be more efficient than the equipment that Antilles Refining has been using and, according to the manufacturer, would reduce direct labor and variable overhead costs by 25%. The old equipment has no resale value. Supervision cost ($52,500 per year) and direct materials cost per drum would not be affected by the new equipment. The new equipment’s capacity would be 105,000 drums per year.

The company’s total general company overhead would be unaffected by this decision. (Round all intermediate calculations to 2 decimal places.)

 

Required:

1. Assuming that 75,000 drums are needed each year, what is the financial advantage (disadvantage) of buying the drums from an outside supplier?

2. Assuming that 87,500 drums are needed each year, what is the financial advantage (disadvantage) of buying the drums from an outside supplier?

3. Assuming that 105,000 drums are needed each year, what is the financial advantage (disadvantage) of buying the drums from an outside supplier?

 

(For all requirements, enter any “disadvantages” as a negative value. Do not round intermediate calculations.)

4. Mary Walker, president of Rusco Company, considers $31,000 to be the minimum cash balance for operating purposes. As can be seen from the following statements, only $26,000 in cash was available at the end of this year. Since the company reported a large net income for the year, and also issued both bonds and common stock, the sharp decline in cash is puzzling to Ms. Walker.

 

Rusco Company Comparative Balance Sheet at July 31
	This Year		Last Year
Assets
Current assets:
Cash	$	26,000		$	46,200
Accounts Receivable		235,400			224,300
Inventory		259,900			202,600
Prepaid expenses		14,700			28,200
Total current assets		536,000			501,300
Long-term investments		123,000			175,000
Plant and equipment		882,000			761,000
Less accumulated depreciation		215,500			193,300
Net plant and equipment		666,500			567,700
Total assets	$	1,325,500		$	1,244,000
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	299,300		$	242,100
Accrued liabilities		9,100			17,200
Income taxes payable		50,800			44,500
Total current liabilities		359,200			303,800
Bonds Payable		233,000			122,000
Total liabilities		592,200			425,800
Stockholders’ equity:
Common stock		687,500			655,000
Retained earnings		45,800			163,200
Total stockholders’ equity		733,300			818,200
Total liabilities and stockholders’ equity	$	1,325,500		$	1,244,000

 

Rusco Company Income Statement For This Year Ended July 31
Sales					$	1,020,000
Cost of goods sold						637,500
Gross margin						382,500
Selling and administrative expenses						272,850
Net operating income						109,650
Nonoperating items:
Gain on sale of investments	$	25,500
Loss on sale of equipment		(8,200	)			17,300
Income before taxes						126,950
Income taxes						38,030
Net income					$	88,920

 

The following additional information is available for this year.

 

a. The company declared and paid a cash dividend.

b. Equipment was sold during the year for $52,800. The equipment originally cost $112,000 and had accumulated depreciation of $51,000.

c. Long-term investments that cost $52,000 were sold during the year for $77,500.

d. The company did not retire any bonds payable or repurchase any of its common stock.

 

Required:

1. Using the indirect method, compute the net cash provided by/used in operating activities for this year.

2. Prepare a statement of cash flows for this year.

3. Compute free cash flow for this year.

5. Joyner Company’s income statement for Year 2 follows:

 

Sales	$	708,000
Cost of goods sold		176,000
Gross margin		532,000
Selling and administrative expenses		217,000
Net operating income		315,000
Nonoperating items:
Gain on sale of equipment		7,000
Income before taxes		322,000
Income taxes		128,800
Net income	$	193,200

 

Its balance sheet amounts at the end of Years 1 and 2 are as follows:

 

	Year 2		Year 1
Assets
Cash	$	134,700		$	93,600
Accounts receivable		261,000			125,000
Inventory		318,000			277,000
Prepaid expenses		8,000			16,000
Total current assets		721,700			511,600
Property, plant, and equipment		639,000			505,000
Less accumulated depreciation		166,200			130,100
Net property, plant, and equipment		472,800			374,900
Loan to Hymans Company		41,000			0
Total assets	$	1,235,500		$	886,500
Liabilities and Stockholders’ Equity
Accounts payable	$	310,000		$	270,000
Accrued liabilities		42,000			54,000
Income taxes payable		86,000			81,500
Total current liabilities		438,000			405,500
Bonds payable		202,000			114,000
Total liabilities		640,000			519,500
Common stock		341,000			273,000
Retained earnings		254,500			94,000
Total stockholders’ equity		595,500			367,000
Total liabilities and stockholders’ equity	$	1,235,500		$	886,500

 

Equipment that had cost $31,200 and on which there was accumulated depreciation of $11,000 was sold during Year 2 for $27,200. The company declared and paid a cash dividend during Year 2. It did not retire any bonds or repurchase any of its own stock.

 

Required:

1. Using the indirect method, compute the net cash provided by/used in operating activities for Year 2.

2. Prepare a statement of cash flows for Year 2.

3. Compute the free cash flow for Year 2.

 

6. A comparative balance sheet and an income statement for Burgess Company are given below:

 

Burgess Company Comparative Balance Sheet (dollars in millions)
	Ending Balance		Beginning Balance
Assets
Current assets:
Cash and cash equivalents	$	49		$	101
Accounts receivable		740			678
Inventory		700			650
Total current assets		1,489			1,429
Property, plant, and equipment		1,605			1,574
Less accumulated depreciation		830			681
Net property,plant, and equipment		775			893
Total assets	$	2,264		$	2,322
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	280		$	170
Accrued liabilities		190			160
Income taxes payable		97			82
Total current liabilities		567			412
Bonds payable		465			700
Total liabilities		1,032			1,112
Stockholders’ equity:
Common stock		195			195
Retained earnings		1,037			1,015
Total stockholders’ equity		1,232			1,210
Total liabilities and stockholders’ equity	$	2,264		$	2,322

 

Burgess Company Income Statement (dollars in millions)
Sales	$	4,000
Cost of goods sold		2,740
Gross margin		1,260
Selling and administrative expenses		900
Net operating income		360
Nonoperating items:
Gain on sale of equipment		2
Income before taxes		362
Income taxes		132
Net income	$	230

 

Burgess also provided the following information:

 

1. The company sold equipment that had an original cost of $32 million and accumulated depreciation of $17 million. The cash proceeds from the sale were $17 million. The gain on the sale was $2 million.

2. The company did not issue any new bonds during the year.

3. The company paid a cash dividend during the year.

4. The company did not complete any common stock transactions during the year.

 

Required:

Using the indirect method, prepare a statement of cash flows for the year. (Enter your answers in millions not in dollars. List any deduction in cash and cash outflows as negative amounts.)