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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 Total Store $3,400,000 $ 740,000 1,870,000 420,000 Sales Cost of goods sold South Store $1,360,000 735,000 East Store $1,300,000 715,000 Gross margin 1,530,000 320,000 625,000 585,000 Selling and administrative expenses: Selling expenses: Administrative expenses 825,000 403,000 235,400 110,000 317,000 156,900 272,600 136,100 Total expenses 1,228,000 345,400 473,900 408,700 Net operating income (loss) $ 302,000 $ (25,400) $ 151,100 $ 176,300 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: 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 is as follows: Total North Store South Store East Store Selling expenses: Sales salaries Direct advertising General advertising* Store rent Depreciation of store fixtures Delivery salaries Depreciation of delivery equipment $ 220,600 $ 64,500 $ 79,400 $ 76,700 183,000 55,000 76,000 52,000 51,000 11,100 20,400 19,500 320,000 89,000 124,000 107,000 18,000 5,000 6,400 6,600 22,200 7,400 7,400 7,400 10,200 3,400 3,400 3,400 Total selling expenses $ 825,000 $235,400 $317,000 $272,600 *Allocated on the basis of sales dollars. North Store South Store East Store Total Administrative expenses: Store management salaries General office salaries* Insurance on fixtures and inventory Utilities Employment taxes General office other* $ 76,000 $ 23,000 51,000 11,200 29,000 8,700 106,530 32,685 55,470 15,915 85,000 18,500 $ 32,000 20,400 11,000 38,620 20,880 34,000 $ 21,000 19,400 9,300 35,225 18,675 32,500 Total administrative expenses $ 403,000 $110,000 $156,900 $136,100 *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 $10,200 per quarter. The general manager of the North Store would be retained at her normal salary of $11,200 per quarter. All other employees in the 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 $4,400 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's employment taxes are 15% of salaries. g. One-third of the insurance in the North Store is on the store's fixtures. h. 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 person's compensation is $5,600 per quarter. Required: 1. Prepare a schedule showing the change in revenues and expenses and the impact on the company's overall net operating income that would result if the North Store were closed. (Any losses/ reductions should be indicated by a minus sign.) Costs that can be avoided: Totalcacts that can be avoided 2. Based on your computations in (1) above, what recommendation would you make to the management of Superior Markets, Inc.? The North Store should be closed. The North Store should not be closed. 3. Assume that if the North Store were closed, at least one-fourth of its sales would transfer to the East Store, due to strong customer loyalty to Superior Markets. The East Store has enough capacity to handle the increased sales. You may assume that the increased sales in the East Store would yield the same gross margin as a percentage of sales as present sales in that store. a. Calculate the net advantage of closing the North Store.(Any reductions or outflows should be indicated by a minus sign.) Gross margin lost if the North Store is closed Gross margin gained from the East Store Net operating (loss) in gross margin Less costs that can be avoided if the North Store is closed Net advantage (disadvantage) of closing the North store b. What recommendation would you make to the management of Superior Markets, Inc.? The North Store should be closed. The North Store should not be closed