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 East Total Store Store Store Sales $3,700,000 $800,000 $1,480,000 $1,420,000 Cost of goods sold 2,035,000 460,000 794,000 781,000 Gross margin 1,665,000 340,000 686,000 639,000 Selling and administrative expenses: Selling expenses 831,000 238,400 318,500 274, 100 Administrative expenses 418,000 113,000 161,400 143,600 Total expenses 1,249,000 351,400 479,900 417,700 Net operating income (loss) $ 416,000 $(11,400) $ 206,100 $ 221,300 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: a. The breakdown of the selling and administrative expenses that are shown above 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 $214,800 172,000 55,500 335,000 19,500 23,100 $ 59,700 58,000 12,000 92,000 5,300 7,700 $ 72,200 79,000 22,200 127,000 6,700 7,700 $ 82,900 35,000 21,300 116,000 7,500 7,700 11,100 $831,000 3,700 $238,400 3,700 $318,500 3,700 $274, 100 *Allocated on the basis of sales dollars. North Store South Store East Store Total $ 24,500 12,000 $ 33,500 22,200 Administrative expenses: Store managers' salaries General office salaries* Insurance on fixtures and inventory Utilities Employment taxes General office-other* Total administrative expenses $ 80,500 55,500 32,000 101,415 56,085 92,500 $418,000 9,600 31,315 15,585 20,000 $113,000 12,500 35,860 20,340 37,000 $161,400 $ 22,500 21,300 9,900 34,240 20,160 35,500 $143,600 *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 $11,000 per quarter. The general manager of the North Store would continue to earn her normal salary of $12,000 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 $4,700 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 $6,000 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? 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 Required 3 Required 4 Required 5 How much employment taxes will the company avoid if it closes the North Store? Employment taxes Required 1 Required 2 Required 3 Required 4 Required 5 What is the financial advantage (disadvantage) of closing the North Store? (Enter any "disadvantages" as a negative value.) Financial advantage (disadvantage) Required 1 Required 2 Required 3 Required 4 Required 5 Assuming that the North Store's floor space can't be subleased, would you recommend closing the North Store? OThe North Store should be closed. The North Store should not be closed. Required 1 Required 2 Required 3 Required 4 Required 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? (Enter any "disadvantages" as a negative value.) Show less A Financial advantage (disadvantage)