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 South East

Store Store Store

Sales 4,300,000 860,000 1,720,000 1,720,000

Cost of goods sold 2,365,000 510,000 909,000 946,000

Gross margin 1,935,000 350,000 811,000 774,000

Selling and administrative expenses:

Selling expenses 843,000 244,400 321,500 277,100

Administrative expenses 448,000 119,000 170,400 158,600

Total expenses 1,291,000 363,400 491,900 435,700

Net operating income (loss) 644,000 -13400 319,100 338,300

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:

a. The breakdown of the selling and administrative expenses that are shown above is as follows:

Total North South East

Store Store Store

Selling expenses:

Sales salaries 250,200 67,000 $ 75,800 $ 107,400

Direct advertising 178,000 64,000 85,000 29,000

General advertising* 64,500 12,900 25,800 25,800

Store rent 290,000 82,000 115,000 93,000

Depreciation of store fixtures 22,500 5,900 7,300 9,300

Delivery salaries 24,900 8,300 8,300 8,300

Depreciation of delivery 12,900 4,300 4,300 4,300

equipment

Total selling expenses 843,000 244,400 321,500 277,100

*Allocated on the basis of sales dollars.

North South East

Total Store Store Store

Administrative expenses:

Store managers' salaries 89,500 27,500 36,500 25,500

General office salaries* 64,500 12,900 25,800 25,800

Insurance on fixtures and inventory 38,000 11,400 15,500 11,100

Utilities 84,135 28,345 27,640 28,150

Employment taxes 64,365 17,355 21,960 25,050

General officeother* 107,500 21,500 43,000 43,000

Total administrative expenses 448,000 119,000 170,400 158,600

*Allocated on the basis of sales dollars.

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

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

c. 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 $11,900 per quarter. The general manager of the North Store would continue to earn her normal salary of $12,900 per quarter. All other managers and employees in the North store would be discharged.

d. 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 $5,300 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.

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

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

g. 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 $6,450 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?