Analysis
Superior Markets Inc.
Submitted by:
Ferrer, Angelo R.
Madrid, Loise-Anne A.
Superior Markets, Inc. operates three stores in a large metropolitan area namely
North Store, East Store, and South Store. The North Store has consistently shown losses
over the past two years. For this reason, management is giving consideration to closing
the store. The following information is provided by the company:
1. Should the company build the proposed plant for them to be able to maximize the
increasing demand in Arizona?
2. What tools does the company may use to know whether they should pursue having
the proposed plant or not? Will those tools will result to a unifying decision
regarding the project's acceptability?
3. Will the proposed plant would earn significantly less than the normal return on
sales of other plants?
4. How many years is needed by the proposed plant to recover the initial investment
incurred by the shaftel ready mix? Will it exceed the minimum payback period of
the company?
5. Which alternative is more beneficial to Superior Markets, Inc., to keep or to drop
North Store?
6. Assuming that the store space cannot be subleased or avoided with no penalty,
will the decision in the previous problem will be affected?
7. For instance, the company decided to close North Store and portion of its sale
will be diverted to East Store. Should Superior Markets Inc. still keep its first
decision?
We, the managerial accountants of Shaftel Ready Mix, was able to discover that the
central problem of the company is regarding the decision whether they should build the
proposed plant in Arizona so that the company will be able to maximize the increasing
demand.
II. Specify the Criterion
The management is planning to have an additional plant in intermountain westen United
States especially in Scottsdale, Arizona. Considering all other factors, the accountants
should be able to determine that benefits of having this decision will exceed its needed
cost.
III. Identify the alternatives
The management identified the following alternatives.
ALTERNATIVE 1 - Pursue building the proposed plant in Scottsdale.
ALTERNATIVE 2 - Focus on the current situation of the company.
IV. Develop a Decision Model
Profitability index, Net present value, Internal rate of return, and payback period is used
by the managerial accountants as a tool for making capital investments decision. Other
aspects like the rising demand for concrete and aggregates are also taken into account.
Figure 5. Flowchart
Differential Analysis
Continue or Drop North Store
31-Dec-16
Selling Expenses:
Sales Salaries Php 70,000.00 Php - Php 70,000.00
Direct Advertising 51,000.00 - 51,000.00
General Advertising 10,800.00 10,800.00 -
B. Store Rent 85,000.00 - 85,000.00
C. Depreciation of Store Fixtures 4,600.00 4,600.00 -
E. Delivery Salaries 7,000.00 3,000.00 4,000.00
E. Depreciation of Delivery Equipment 3,000.00 3,000.00 -
Total selling expenses Php 231,400.00 Php 21,400.00 Php 210,000.00
Administrative Expenses:
D. Store Management Salaries Php 21,000.00 Php 12,000.00 Php 9,000.00
General Office Salaries 12,000.00 6,000.00 6,000.00
G. Insurance on Fixtures and Inventory 7,500.00 2,500.00 5,000.00
Utilities 31,000.00 - 31,000.00
F. Employment Taxes 18,150.00 3,150.00 15,000.00
General Office - other 18,000.00 18,000.00 -
D. Salary of a New Manager 11,000.00 - 11,000.00
Total administrative expenses Php 118,650.00 Php 41,650.00 Php 77,000.00
Selling Expenses:
Sales Salaries Php 70,000.00 Php - Php 70,000.00
Direct Advertising 51,000.00 - 51,000.00
General Advertising 10,800.00 10,800.00 -
B. Store Rent 85,000.00 85,000.00
C. Depreciation of Store Fixtures 4,600.00 4,600.00 -
E. Delivery Salaries 7,000.00 3,000.00 4,000.00
E. Depreciation of Delivery Equipment 3,000.00 3,000.00 -
Total selling expenses Php 231,400.00 Php 106,400.00 Php 125,000.00
Administrative Expenses:
D. Store Management Salaries Php 21,000.00 Php 12,000.00 Php 9,000.00
General Office Salaries 12,000.00 6,000.00 6,000.00
G. Insurance on Fixtures and Inventory 7,500.00 2,500.00 5,000.00
Utilities 31,000.00 - 31,000.00
F. Employment Taxes 18,150.00 3,150.00 15,000.00
General Office - other 18,000.00 18,000.00 -
D. Salary of a New Manager 11,000.00 - 11,000.00
Total administrative expenses Php 118,650.00 Php 41,650.00 Php 77,000.00
Selling Expenses:
Sales Salaries Php 70,000.00 Php - Php 70,000.00
Direct Advertising 51,000.00 - 51,000.00
General Advertising 10,800.00 10,800.00 -
B. Store Rent 85,000.00 - 85,000.00
C. Depreciation of Store Fixtures 4,600.00 4,600.00 -
E. Delivery Salaries 7,000.00 3,000.00 4,000.00
E. Depreciation of Delivery Equipment 3,000.00 3,000.00 -
Total selling expenses Php 231,400.00 Php 21,400.00 Php 210,000.00
Administrative Expenses:
D. Store Management Salaries Php 21,000.00 Php 12,000.00 Php 9,000.00
General Office Salaries 12,000.00 6,000.00 6,000.00
G. Insurance on Fixtures and Inventory 7,500.00 2,500.00 5,000.00
Utilities 31,000.00 - 31,000.00
F. Employment Taxes 18,150.00 3,150.00 15,000.00
General Office - other 18,000.00 18,000.00 -
D. Salary of a New Manager 11,000.00 - 11,000.00
Total administrative expenses Php 118,650.00 Php 41,650.00 Php 77,000.00
Net Operating Income (Net advantage of closing the North) Php 114,250.00 Php (63,050.00) Php 51,200.00
Figure 8. Differential Analysis of Problem 3
V. Collect the data
Information presented in the case of Shaftel Ready Mix that is needed in the decision
making process like the summary of expenses is used by the managerial accountants.
CONCEPT MAPPING
This aid them in making rcommendations to the company.
QUALITATIVE CONSIDERATIONS
VI. Make a decision
The flowchart presented indicated that both alternatives in assumptions 1 and 2
will incur a loss. However, the level of loss between each alternative must be considered
to determine which one has the least effect on decreasing the total net operating income
of the entire company.
While in the case of 3rd assumption, aside from the differential segment margin
and avoidable selling and administrative expenses, possible gross margin to be gained
from the East store when deciding whether to close or to keep North Store.
A. We suggest that the store shall be kept in order to avoid incurring further losses.
B. Considering that the store rent becomes unavoidable in the second assumption,
we recommend to the management the continuance of North Store operations.
C. We suggest to discontinue operations of North Store because this action will
provide higher sales on East Store given that some customers from North Store
move and purchase to the East Store.
D. Payback Period =
E. =
F. = 3.28 years
H. Karl is wrong. The book value of the equipment and the furniture should not be
J. cost associated with them. Excluding the book value reduces the investment from
L. furniture could be sold for their book value because there would now be an
M. opportunity cost associated with them and that cost should be included in the
N. original investment.
O. 3. NPV:
P. Year
Q. 0
R. 110
S. NPV $ 306,698
W. 3.24%
X. $(352,000)
Y. Present Value
Z. 107,200
BB. 6.14457
EE. $(352,000)
FF.658,698
GG. $107,200**
HH. $352,000