Problem 13-26 (Algo) Close or Retain a Store [LO13-2] 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 Total Sales Cost of goods sold Gross margin Selling and administrative expenses: Selling expenses Administrative expenses For the Quarter Ended September 30 North Store $ 3,060,000 1,690,344 $ 734,400 411,264 South Store $ 1,224,000 673,200 East Store $ 1,101,600 605,880 1,369,656 323,136 550,800 495,720 833,340 236,028 321,300 276,012 390,660 108,120 153,918 128,622 1,224,000 344,148 475,218 404,634 $ 145,656 $ (21,012) $ 75,582 Total expenses Net operating income (loss) $ 91,086 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: Selling expenses: Sales salaries Direct advertising General advertising* Store rent Depreciation of store fixtures Delivery salaries Depreciation of delivery equipment Total selling expenses *Allocated on the basis of sales dollars. Administrative expenses: Store managers' salaries General office salaries* Insurance on fixtures and inventory Utilities Employment taxes General office-other* Total administrative expenses *Allocated on the basis of sales dollars. Total North Store South Store East Store $ 243,780 190,740 45,900 $ 71,400 52,020 $ 90,780 73,440 $ 81,600 65,280 11,016 18,360 16,524 306,000 86,700 122,400 96,900 16,320 4,692 6,120 5,508 21,420 7,140 7,140 9,180 3,060 3,060 7,140 3,060 $ 833,340 $ 236,028 $ 321,300 $ 276,012 Total North Store South Store East Store $ 71,400 51,000 25,500 $ 21,420 12,240 7,650 $ 30,600 20,400 9,180 $ 19,380 18,360 8,670 108,120 31,620 40,800 35,700 58,140 16,830 22,338 18,972 76,500 18,360 30,600 27,540 $ 390,660 $ 108,120 $ 153,918 $ 128,622 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 $11,220 per quarter. The general manager of the North Store would continue to earn her normal salary of $12,240 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 $4,080 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, 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 $6,120 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