Reference no: EM132018861

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 $ 4,700,000 $ 940,000 $ 1,880,000 $ 1,880,000 Cost of goods sold 2,585,000 580,000 971,000 1,034,000 Gross margin 2,115,000 360,000 909,000 846,000 Selling and administrative expenses: Selling expenses 851,000 248,400 323,500 279,100 Administrative expenses 468,000 123,000 176,400 168,600 Total expenses 1,319,000 371,400 499,900 447,700 Net operating income (loss) $ 796,000 $ (11,400 ) $ 409,100 $ 398,300 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 $ 252,800 $ 60,600 $ 80,200 $ 112,000 Direct advertising 182,000 68,000 89,000 25,000 General advertising* 70,500 14,100 28,200 28,200 Store rent 281,000 86,000 105,000 90,000 Depreciation of store fixtures 24,500 6,300 7,700 10,500 Delivery salaries 26,100 8,700 8,700 8,700 Depreciation of delivery equipment 14,100 4,700 4,700 4,700 Total selling expenses $ 851,000 $ 248,400 $ 323,500 $ 279,100 *Allocated on the basis of sales dollars. Total North Store South Store East Store Administrative expenses: Store managers' salaries $ 95,500 $ 29,500 $ 38,500 $ 27,500 General office salaries* 70,500 14,200 28,200 28,100 Insurance on fixtures and inventory 42,000 12,600 17,500 11,900 Utilities 75,765 26,250 21,860 27,655 Employment taxes 66,735 16,950 23,340 26,445 General office—other* 117,500 23,500 47,000 47,000 Total administrative expenses $ 468,000 $ 123,000 $ 176,400 $ 168,600 *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 $13,200 per quarter. The general manager of the North Store would continue to earn her normal salary of $14,200 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 $5,700 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 office—other” 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 $7,100 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?