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:

2. *Allocated on the basis of sales dollars.

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

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

5. 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 $14,960 per quarter. The general manager of the North Store would continue to earn her normal salary of $16,320 per quarter. All other managers and employees in the North store would be discharged.

6. 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 $5,440 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.

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

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

9. 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 $8,160 per quarter.

10. 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 South Total Store Store Sales $4,080,000 $979,200 $1,632,000 Cost of goods sold 2,253,792 548,352 897,600 Gross margin 1,826, 208 430, 848 734,400 Selling and administrative expenses: Selling expenses 1,111,120 314,704 428,400 Administrative expenses 520,880 144,160 205, 224 Total expenses 1,632,000 458,864 633,624 Net operating income (loss) $ 194,208 $(28,016) $ 100,776 East Store $1,468,800 807,840 660,960 368,016 171,496 539,512 121,448 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 $ 325,040 254,320 61,200 408,000 21,760 28,560 12,240 $ 95,200 69,360 14,688 115,600 6,256 9,520 4,080 $121,040 97,920 24,480 163,200 8,160 9,520 4,080 $108,800 87,040 22,032 129,200 7,344 9,520 4,080 $1,111,120 $314,704 $428,400 $368,016 *Allocated on the basis of sales dollars. 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* Total administrative expenses $ 95,200 68,000 34,000 144,160 77,520 102,000 $520,880 $ 28,560 16,320 10,200 42,160 22,440 24,480 $144,160 $ 40,800 27,200 12,240 54,400 29,784 40, 800 $205, 224 $ 25,840 24,480 11,560 47,600 25, 296 36,720 $171,496