Profits have been decreasing for several years at Pegasus Airlines. In an effort to improve the companys performance, the company is thinking about dropping several flights that appear to be unprofitable.

A typical income statement for one round-trip of one such flight (flight 482) is as follows:

Ticket revenue (190 seats 40% occupancy $210 ticket price)	$	15,960			100.0	%
Variable expenses ($19.00 per person)		1,444			9
Contribution margin		14,516			91	%
Flight expenses:
Salaries, flight crew	$	1,700
Flight promotion		770
Depreciation of aircraft		1,750
Fuel for aircraft		5,500
Liability insurance		5,400
Salaries, flight assistants		1,500
Baggage loading and flight preparation		1,850
Overnight costs for flight crew and assistants at destination		700
Total flight expenses		19,170
Net operating loss	$	(4,654	)

The following additional information is available about flight 482:

1. Members of the flight crew are paid fixed annual salaries, whereas the flight assistants are paid based on the number of round trips they complete.

2. One-third of the liability insurance is a special charge assessed against flight 482 because in the opinion of the insurance company, the destination of the flight is in a high-risk area. The remaining two-thirds would be unaffected by a decision to drop flight 482.

3. The baggage loading and flight preparation expense is an allocation of ground crews salaries and depreciation of ground equipment. Dropping flight 482 would have no effect on the companys total baggage loading and flight preparation expenses.

4. If flight 482 is dropped, Pegasus Airlines has no authorization at present to replace it with another flight.

5. Aircraft depreciation is due entirely to obsolescence. Depreciation due to wear and tear is negligible.

6. Dropping flight 482 would not allow Pegasus Airlines to reduce the number of aircraft in its fleet or the number of flight crew on its payroll.

Required:

1. What is the financial advantage (disadvantage) of discontinuing flight 482?

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
	Total			North Store			South Store			East Store
Sales	$	4,100,000		$	860,000		$	1,640,000		$	1,600,000
Cost of goods sold		2,255,000			515,000			860,000			880,000
Gross margin		1,845,000			345,000			780,000			720,000
Selling and administrative expenses:
Selling expenses		839,000			242,400			320,500			276,100
Administrative expenses		438,000			117,000			167,400			153,600
Total expenses		1,277,000			359,400			487,900			429,700
Net operating income (loss)	$	568,000		$	(14,400	)	$	292,100		$	290,300

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:

1. The breakdown of the selling and administrative expenses that are shown above is as follows:

	Total		North Store		South Store		East Store
Selling expenses:
Sales salaries	$	263,400	$	69,600	$	80,600	$	113,200
Direct advertising		176,000		62,000		83,000		31,000
General advertising*		61,500		12,900		24,600		24,000
Store rent		280,000		80,000		113,000		87,000
Depreciation of store fixtures		21,500		5,700		7,100		8,700
Delivery salaries		24,300		8,100		8,100		8,100
Depreciation of delivery equipment		12,300		4,100		4,100		4,100
Total selling expenses	$	839,000	$	242,400	$	320,500	$	276,100

*Allocated on the basis of sales dollars.

	Total		North Store		South Store		East Store
Administrative expenses:
Store managers' salaries	$	86,500	$	26,500	$	35,500	$	24,500
General office salaries*		61,500		12,900		24,600		24,000
Insurance on fixtures and inventory		36,000		10,800		14,500		10,700
Utilities		86,145		27,735		29,480		28,930
Employment taxes		65,355		17,565		22,320		25,470
General officeother*		102,500		21,500		41,000		40,000
Total administrative expenses	$	438,000	$	117,000	$	167,400	$	153,600

*Allocated on the basis of sales dollars.

1. The lease on the building housing the North Store can be broken with no penalty.

2. The fixtures being used in the North Store would be transferred to the other two stores if the North Store were closed.

3. 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 $11,900 per quarter. The general manager of the North Store would continue to earn her normal salary of $12,900 per quarter. All other managers and employees in the North store would be discharged.

4. The company has one delivery crew that serves all three stores. One delivery person could be discharged if the North Store were closed. This persons salary is $5,100 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.

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

6. One-third of the insurance in the North Store is on the stores fixtures.

7. The General office salaries and General officeother 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 persons compensation is $6,450 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 cant be subleased, would you recommend closing the North Store?

5. Assume that the North Store's floor space cant 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?