require Superior Markets, Inc., operates three stores in a large metropolitan area. A segmented absorption costing income statemen 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 $3,600,000 $800,000 $1,440,000 Cost of goods sold 1,980,000 470,000 762,000 Gross margin 1,620,000 330,000 678,000 Selling and administrative expenses: Selling expenses 829,000 237,400 318,000 Administrative expenses 413,000 112,000 159,900 Total expenses 1, 242,000349,400 477,900 Net operating income (loss) $ 378,000 $(19,400) $ 200,100 East Store $1,360,000 748,000 612,000 273,600 1 41,100 414,700 197,300 $ 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 Total East Store Selling expenses: Sales salaries Direct advertising General advertising* Store rent Depreciation of store fixtures Delivery salaries Depreciation of delivery equipment Total selling expenses $221,400 171,000 54,000 330,000 19,000 22,800 $ 61,000 57,000 12,000 91,000 5,200 7,600 $ 74,600 78,000 21,600 126,000 6,600 7,600 $ 85,800 36,000 20,400 113,000 7,200 7,600 10,800 $829,000 3,600 $237,400 3,600 $318,000 3,600 $273,600 *Allocated on the basis of sales dollars. North Store South Store East Store Total $ 79,000 54,000 $ 24,000 12,000 $ 33,000 21,600 $ 22,000 20,400 31,000 9,300 12,000 9,700 Administrative expenses: Store managers' salaries General office salaries* Insurance on fixtures and inventory Utilities Employment taxes General office-other* Total administrative expenses 102,420 56,580 90,000 $413,000 31,010 15,690 20,000 $112,000 36,780 20,520 36,000 $159,900 34,630 20, 370 34,000 $141,100 *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 $4,600 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