Problem 6-26 (Algo) Close or Retain a Store [LOB-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 Tbtal Store Store Store Sales $3,100,000 $700,000 $1,240,000 $1,160,000 Cost of goods sold 1,705,000 330,000 637,000 633,000 Gross margin 1,395,000 320,000 553,000 522,000 Selling and administrative expenses: Selling expenses 319,000 232,400 315,500 271,100 Administrative expenses 333,000 107,000 152,400 123,500 Total expenses 1,207,000 339,400 467,900 399,700 Net operating income (loss) $ 133,000 $[19,400l 3 35,100 3 122,300 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 South East Total Store Store Store Selling expenses: Sales salaries $240,400 $ 69,000 $ 36,600 $ 34,300 Direct advertising 130,000 52,000 73,000 55,000 General advertisingi 46,500 10,500 13,600 17,400 Store rent 305,000 36,000 121,000 93,000 Depreciation of store fixtures 16,500 4,700 6,100 5,700 Delivery salaries 21,300 7,100 7,100 7,100 Depreoiation of delivery 9.300 3.100 3.100 3.100 equipment Total Belling expenses $319,000 $232,400 $315,500 $271,100 ' 'Allocated on the basis of sales dollars. North South East Total Store Store Store Administrative expenses: Store managers' salaries $ 71,500 $ 21,500 $ 30,500 $ 19,500 General office salaries* 46,500 11,000 13,500 16,900 Insurance on fixtures and 26,000 7'300 9500 3,700 inventory Utilities 109,545 32,910 41,330 35,255 Employment taxes 56,955 16,290 21,420 19,245 General officeother* 77,500 17,500 31,000 29,000 Total administrative expenses $333,000 $107,000 $152,400 $123,500 [ '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 $10,000 per quarter. The general manager of the North Store would continue to earn her normal salary of $11,000 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 $4,100 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 $5,500 per quarter