Problem 11-26 Close or Retain a Store (LO11-2) 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 North South Total Store Store Sales $3,100,000 $ 700,000 $1,240,000 Cost of goods sold 1,705,000 380,000 687,000 Gross margin 1,395,000 320,000 553,000 Selling and administrative expenses: Selling expenses 819,000 232,400 315,500 Administrative expenses 388,000 107,000 152,400 Total expenses 1,207,000 339, 400 467,900 Net operating income (loss) $ 188,000 $(19,400) $ 85,100 East Store $1,160,000 638,000 522,000 271,100 128,600 399,700 122,300 $ 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: North Store South Store East Store Total Selling expenses: Sales salaries Direct advertising General advertising Store rent Depreciation of store fixtures Delivery salaries Depreciation of delivery equipment Total selling expenses $240,400 180,000 46,500 305,000 16,500 21,300 $ 69,000 52,000 10,500 86,000 4,700 7,100 $ 86,600 73,000 18,600 121,000 6,100 7,100 $ 84,800 55,000 17,400 98,000 5,700 7,100 9,300 $819,000 3,100 $232,400 3,100 $315,500 3,100 $271,100 *Allocated on the basis of sales dollars. North Store South Store East Store Total $ 71,500 46,500 $ 21,500 10,500 7,800 $ 30,500 18,600 $ 19,500 17,400 8,700 26,000 Administrative expenses: Store managers' salaries General office salariest Insurance on fixtures and inventory Utilities Employment taxes General office-other* Total administrative expenses 109,545 56,955 77,500 $388,000 33,485 16, 215 17,500 $107,000 9,500 41,380 21,420 31,000 $152,400 34,680 19,320 29,000 $128,600 *Allocated on the basis of sales dollars. 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 $9,500 per quarter. The general manager of the North Store would continue to earn her normal salary of $10,500 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 if the North Store were closed. This person's salary is $4,100 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. 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 store's fixtures. h. 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 $5,250 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? Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 Required 4 Required 5 How much employee salaries will the company avoid if it closes the North Store? Employee salaries Required 1 Required 2 >