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:

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:

*Allocated on the basis of sales dollars.

*Allocated on the basis of sales dollars.

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

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

4. 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 $11,600 per quarter. The general manager of the North Store would continue to earn her normal salary of $12,600 per quarter. All other managers and employees in the North store would be discharged.

5. 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 $5,000 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.

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

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

8. 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 $6,300 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?

Superior Markets, Inc. Income Statement For the Quarter Ended September 30 North Store South Store East Store Total Sales Cost of goods sold Gross margin Selling and administrative expenses: $4,000,000 840,000 $1,600,000 $1,560,000 858,000 702,000 2,200,000 495,000 1,800,000 345,000 847,000 753,000 Selling expenses Administrative expenses 275,600 151,100 426,700 $ 530,000 (12,400) 267,100 275,300 837,000 241,400 433,000 116,000 357,400 320,000 165,900 Total expenses Net operating income (loss) 1,270,000 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 $235,000 55,200 83,000 96,800 175,000 61,000 82,000 32,000 60,000 12,600 24,00 23,400 310,00095,000 112,000 103,00 8,400 8,000 4,000 $837,000 241,400 $320,000 $275,600 7,000 21,000 24,000 8,8,000 5,600 12,000 4,000 4,009 equipment Total selling expenses North Store South Store East Store Total Administrative expenses: Store managers' salaries General office salaries Insurance on fixtures and inventory Utilities Employment taxes General office-other* $ 85,000 26,000 35,000 24,000 60,000 12,60024,000 23,400 35,000 10,500 14,000 10,500 92,400 30,630 3,400 31,370 60,600 15,270 22,500 22,830 39,000 $433,000 $116,000 $165,900 $151,100 100,000 21,000 40,000 Total administrative expenses