Superior Markets, Incorporated, 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, Incorporated
Income Statement
For the Quarter Ended September 30
Total North Store South Store East Store
Sales $ 4,200,000 $ 1,008,000 $ 1,680,000 $ 1,512,000
Cost of goods sold 2,320,080 564,480 924,000 831,600
Gross margin 1,879,920 443,520 756,000 680,400
Selling and administrative expenses:
Selling expenses 1,143,800 323,960 441,000 378,840
Administrative expenses 536,200 148,400 211,260 176,540
Total expenses 1,680,000 472,360 652,260 555,380
Net operating income (loss) $ 199,920 $ (28,840) $ 103,740 $ 125,020


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 $ 334,600 $ 98,000 $ 124,600 $ 112,000
Direct advertising 261,800 71,400 100,800 89,600
General advertising* 63,000 15,120 25,200 22,680
Store rent 420,000 119,000 168,000 133,000
Depreciation of store fixtures 22,400 6,440 8,400 7,560
Delivery salaries 29,400 9,800 9,800 9,800
Depreciation of delivery equipment 12,600 4,200 4,200 4,200
Total selling expenses $ 1,143,800 $ 323,960 $ 441,000 $ 378,840
*Allocated on the basis of sales dollars.



Total North Store South Store East Store
Administrative expenses:
Store managers' salaries $ 98,000 $ 29,400 $ 42,000 $ 26,600
General office salaries* 70,000 16,800 28,000 25,200
Insurance on fixtures and inventory 35,000 10,500 12,600 11,900
Utilities 148,400 43,400 56,000 49,000
Employment taxes 79,800 23,100 30,660 26,040
General office—other* 105,000 25,200 42,000 37,800
Total administrative expenses $ 536,200 $ 148,400 $ 211,260 $ 176,540
*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 $15,400 per quarter. The general manager of the North Store would continue to earn her normal salary of $16,800 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 $5,600 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, 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 $8,400 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?

The company will avoid $289,800 in costs if it closes the North Store. This outweighs the $28,840 in lost net operating income.

Therefore, the company should close the North Store.

The company will avoid $252,000 in employee salaries if it closes the North Store. This includes the salaries of all managers and employees in the North Store, as well as the salary of the general manager who would be transferred to another position.

The company will avoid $37,800 in employment taxes if it closes the North Store. This is equal to 15% of the $252,000 in employee salaries that will be avoided.

The financial advantage of closing the North Store is that the company will avoid $289,800 in costs. This includes the $252,000 in employee salaries and the $37,800 in employment taxes.

The financial disadvantage of closing the North Store is that the company will lose $28,840 in net operating income.

This is the amount of net operating income that the North Store generated in the last quarter.

Overall, the financial advantage of closing the North Store outweighs the financial disadvantage. Therefore, the company should close the North Store.

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