Problem $13-28($Algo$)$ Close or Retain a Store $[$LO$13-2]$

Superior Markets, Incorporated, 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, Incorporated

Income Statement

For the Quarter Ended September $30$

Total North Store South Store East Store

Sales $ $3,720,000$ $ $892,800$ $ $1,488,000$ $ $1,339,200$

Cost of goods sold $2,054,928499,968818,400736,560$

Gross margin $1,665,072392,832669,600602,640$

Selling and administrative expenses:

Selling expenses $1,013,080286,936390,600335,544$

Administrative expenses $474,920131,440187,116156,364$

Total expenses $1,488,000418,376577,716491,908$

Net operating income $($loss$)$ $ $177,072$ $ $(25,544)$ $ $91,884$ $ $110,732$

The North Store has consistently shown losses over the past two years, so management is considering closing this store.

A detailed breakdown of the selling and administrative expenses shown above is as follows:

Total North Store South Store East Store

Selling expenses:

Sales salaries $ $296,360$ $ $86,800$ $ $110,360$ $ $99,200$

Direct advertising $231,88063,24089,28079,360$

General advertising$*55,80013,39222,32020,088$

Store rent $372,000105,400148,800117,800$

Depreciation of store fixtures $19,8405,7047,4406,696$

Delivery salaries $26,0408,6808,6808,680$

Depreciation of delivery equipment $11,1603,7203,7203,720$

Total selling expenses $ $1,013,080$ $ $286,936$ $ $390,600$ $ $335,544$

$*$Allocated on the basis of sales dollars.

Total North Store South Store East Store

Administrative expenses:

Store managers' salaries $ $86,800$ $ $26,040$ $ $37,200$ $ $23,560$

General office salaries$*62,00014,88024,80022,320$

Insurance on fixtures and inventory $31,0009,30011,16010,540$

Utilities $131,44038,44049,60043,400$

Employment taxes $70,68020,46027,15623,064$

General office$$other$*93,00022,32037,20033,480$

Total administrative expenses $ $474,920$ $ $131,440$ $ $187,116$ $ $156,364$

$*$Allocated on the basis of sales dollars.

The North Store$$s rental agreement can be broken with no penalty.

The North Store$$s fixtures would be transferred to the other two stores if it were closed.

The North Store$$s general manager would be transferred to another position in the company if it were closed. She would fill a position that otherwise would have required hiring a new employee at a salary of $$13,640$ per quarter. The general manager of the North Store would continue to earn her normal salary of $$14,880$ per quarter. All other managers and employees in the North Store would be discharged.

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$$s salary is $$4,960$ per quarter. The delivery equipment would be distributed to the other stores. The equipment does not wear out through use.

The company pays employment taxes equal to $15\%$ of their employees' salaries.

One$-$third of the North Store$$s insurance relates to its fixtures.

The $$General office salaries$$ and $$General office$$other$$ relate to the overall management of Superior Markets, Incorporated. If the North Store were closed, one person in the general office could be discharged because of the decrease in overall workload. This person$$s compensation is $$7,440$ per quarter.

Required:

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

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

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

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

Assume the North Store's floor space can$$t be subleased. However, let's introduce three more assumptions. First, 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, the East Store has enough capacity to handle the increased sales that would arise from closing the North Store. Third, 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?