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 Total Store Store Sales $3,420,000 $ 820, 800 $1,368,000 Cost of goods sold 1,889, 208 459,648 752,400 Gross margin 1,530,792 361,152 615, 600 Selling and administrative expenses : Selling expenses 931,380 263,796 359,100 Administrative expenses 436, 620 120, 840 172,026 Total expenses 1,368,000 531,126 Net operating income (loss) $ 162,792 $ (23,484) $ 84,474 East Store $1,231,200 677,160 554,040 384,636 308, 484 143,754 452,238 101,802 $ 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 East Store Total Selling expenses: Sales salaries Direct advertising General advertising* Store rent Depreciation of store fixtures Delivery salaries Depreciation of delivery equipment Total selling expenses $ 272,460 213,180 51,300 342,000 18,240 23,940 10,260 $ 79,800 58,140 12,312 96,900 5,244 7,980 3,420 $ 101,460 82,080 20,520 136,800 6,840 7,980 3,420 $ 91,200 72,960 18,468 108,300 6,156 7,980 3,420 $ 931,380 $ 263,796 $ 359,100 $ 308, 484 *Allocated on the basis of sales dollars. North Store South Store East Store Total $ 23,940 13,680 8,550 $ 34,200 22,800 $ 21,660 20,520 9,690 Administrative expenses: Store managers' salaries General office salaries* Insurance on fixtures and inventory Utilities Employment taxes General office-other* Total administrative expenses $ 79,800 57,000 28,500 120,840 64,980 85,500 $ 436,620 35, 340 18,810 20,520 $ 120,840 10,260 45,600 24,966 34,200 $ 172,026 39,900 21, 204 30,780 $ 143, 754 *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 $12,540 per quarter. The general manager of the North Store would continue to earn her normal salary of $13,680 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 $4,560 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 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 $6,840 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? 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 Total Store Store Sales $3,420,000 $ 820, 800 $1,368,000 Cost of goods sold 1,889, 208 459,648 752,400 Gross margin 1,530,792 361,152 615, 600 Selling and administrative expenses : Selling expenses 931,380 263,796 359,100 Administrative expenses 436, 620 120, 840 172,026 Total expenses 1,368,000 531,126 Net operating income (loss) $ 162,792 $ (23,484) $ 84,474 East Store $1,231,200 677,160 554,040 384,636 308, 484 143,754 452,238 101,802 $ 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 East Store Total Selling expenses: Sales salaries Direct advertising General advertising* Store rent Depreciation of store fixtures Delivery salaries Depreciation of delivery equipment Total selling expenses $ 272,460 213,180 51,300 342,000 18,240 23,940 10,260 $ 79,800 58,140 12,312 96,900 5,244 7,980 3,420 $ 101,460 82,080 20,520 136,800 6,840 7,980 3,420 $ 91,200 72,960 18,468 108,300 6,156 7,980 3,420 $ 931,380 $ 263,796 $ 359,100 $ 308, 484 *Allocated on the basis of sales dollars. North Store South Store East Store Total $ 23,940 13,680 8,550 $ 34,200 22,800 $ 21,660 20,520 9,690 Administrative expenses: Store managers' salaries General office salaries* Insurance on fixtures and inventory Utilities Employment taxes General office-other* Total administrative expenses $ 79,800 57,000 28,500 120,840 64,980 85,500 $ 436,620 35, 340 18,810 20,520 $ 120,840 10,260 45,600 24,966 34,200 $ 172,026 39,900 21, 204 30,780 $ 143, 754 *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 $12,540 per quarter. The general manager of the North Store would continue to earn her normal salary of $13,680 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 $4,560 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 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 $6,840 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