Superior Markets, Incorporated Income Statement For the Quarter Ended September 30 Total $ 3,660,000 North Store $ 878,400 491,904 South Store $ 1,464,000 805,200 East Store $ 1,317,600 724,680 Sales Cost of goods sold Gross margin Selling and administrative expenses: Selling expenses Administrative expenses Total expenses Net operating income (loss) 2,021,784 1,638,216 996,740 467,260 1,464,000 386,496 658,800 592,920 282,308 384,300 330,132 129,320 184,098 153,842 411,628 568,398 483,974 $ 174,216 $ (25,132) $ 90,402 $ 108,946 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: Selling expenses: Sales salaries Direct advertising General advertising* Store rent Depreciation of store fixtures Delivery salaries. Depreciation of delivery equipment Total selling expenses *Allocated on the basis of sales dollars. Administrative expenses: Store managers' salaries General office salaries* Insurance on fixtures and inventory Utilities Employment taxes General office-other* Total administrative expenses *Allocated on the basis of sales dollars. Total North Store South Store East Store $ 291,580 228,140 54,900 $ 85,400 62,220 $ 108,580 87,840 $ 97,600 78,080 13,176 21,960 19,764 366,000 103,700 146,400 115,900 19,520 5,612 7,320 6,588 25,620 8,540 10,980 3,660 8,540 3,660 8,540 3,660 $ 996,740 $ 282,308 $ 384,300 $ 330,132 Total North Store South Store East Store $ 85,400 61,000 30,500 $ 25,620 14,640 9,150 $ 36,600 24,400 $ 23,180 21,960 10,980 10,370 129,320 37,820 48,800 42,700 69,540 20,130 26,718 22,692 91,500 21,960 36,600 32,940 $ 467,260 $ 129,320 $ 184,098 $ 153,842 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 $13,420 per quarter. The general manager of the North Store would continue to earn her normal salary of $14,640 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 $4,880 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 office-other" relate to the overall management of Superior Markets, Incorporated. 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 $7,320 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?