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 $ 3,400,000 $ 740,000 $ 1,360,000 $ 1,300,000

Cost of goods sold 1,870,000 420,000 735,000 715,000

Gross margin 1,530,000 320,000 625,000 585,000

Selling and administrative expenses:

Selling expenses 825,000 235,400 317,000 272,600

Administrative expenses 403,000 110,000 156,900 136,100

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 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 $ 220,600 $ 64,500 $ 79,400 $ 76,700

Direct advertising 183,000 55,000 76,000 52,000

General advertising* 51,000 11,100 20,400 19,500

Store rent 320,000 89,000 124,000 107,000

Depreciation of store fixtures 18,000 5,000 6,400 6,600

Delivery salaries 22,200 7,400 7,400 7,400

Depreciation of delivery

equipment 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.

Total North

Store South

Store East

Store

Administrative expenses:

Store managers' salaries $ 76,000 $ 23,000 $ 32,000 $ 21,000

General office salaries* 51,000 11,200 20,400 19,400

Insurance on fixtures and inventory 29,000 8,700 11,000 9,300

Utilities 106,530 32,685 38,620 35,225

Employment taxes 55,470 15,915 20,880 18,675

General officeother* 85,000 18,500 34,000 32,500

Total administrative expenses $ 403,000 $ 110,000 $ 156,900 $ 136,100

*Allocated on the basis of sales dollars.

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

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

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 continue to earn her normal salary of $11,200 per quarter. All other managers and employees in the North store would be discharged.

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.

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

One-third of the insurance in the North Store is on the store's fixtures.

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. 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?