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 $ 3,360,000 $ 806,400 $ 1,344,000 $ 1,209,600

Cost of goods sold 1,856,064 451,584 739,200 665,280

Gross margin 1,503,936 354,816 604,800 544,320

Selling and administrative expenses:

Selling expenses 915,040 259,168 352,800 303,072

Administrative expenses 428,960 118,720 169,008 141,232

Total expenses 1,344,000 377,888 521,808 444,304

Net operating income (loss) $ 159,936 $ (23,072) $ 82,992 $ 100,016

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 $ 267,680 $ 78,400 $ 99,680 $ 89,600

Direct advertising 209,440 57,120 80,640 71,680

General advertising* 50,400 12,096 20,160 18,144

Store rent 336,000 95,200 134,400 106,400

Depreciation of store fixtures 17,920 5,152 6,720 6,048

Delivery salaries 23,520 7,840 7,840 7,840

Depreciation of delivery equipment 10,080 3,360 3,360 3,360

Total selling expenses $ 915,040 $ 259,168 $ 352,800 $ 303,072

*Allocated on the basis of sales dollars.

Total North Store South Store East Store

Administrative expenses:

Store managers' salaries $ 78,400 $ 23,520 $ 33,600 $ 21,280

General office salaries* 56,000 13,440 22,400 20,160

Insurance on fixtures and inventory 28,000 8,400 10,080 9,520

Utilities 118,720 34,720 44,800 39,200

Employment taxes 63,840 18,480 24,528 20,832

General office—other* 84,000 20,160 33,600 30,240

Total administrative expenses $ 428,960 $ 118,720 $ 169,008 $ 141,232

*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 $12,320 per quarter. The general manager of the North Store would continue to earn her normal salary of $13,440 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 $4,480 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 $6,720 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?

Please show work.

Question

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:

	Total	North Store	South Store	East Store
Superior Markets, Incorporated Income Statement For the Quarter Ended September 30
Sales	$ 3,360,000	$ 806,400	$ 1,344,000	$ 1,209,600
Cost of goods sold	1,856,064	451,584	739,200	665,280
Gross margin	1,503,936	354,816	604,800	544,320
Selling and administrative expenses:
Selling expenses	915,040	259,168	352,800	303,072
Administrative expenses	428,960	118,720	169,008	141,232
Total expenses	1,344,000	377,888	521,808	444,304
Net operating income (loss)	$ 159,936	$ (23,072)	$ 82,992	$ 100,016

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	$ 267,680	$ 78,400	$ 99,680	$ 89,600
Direct advertising	209,440	57,120	80,640	71,680
General advertising*	50,400	12,096	20,160	18,144
Store rent	336,000	95,200	134,400	106,400
Depreciation of store fixtures	17,920	5,152	6,720	6,048
Delivery salaries	23,520	7,840	7,840	7,840
Depreciation of delivery equipment	10,080	3,360	3,360	3,360
Total selling expenses	$ 915,040	$ 259,168	$ 352,800	$ 303,072

*Allocated on the basis of sales dollars.

	Total	North Store	South Store	East Store
Administrative expenses:
Store managers' salaries	$ 78,400	$ 23,520	$ 33,600	$ 21,280
General office salaries*	56,000	13,440	22,400	20,160
Insurance on fixtures and inventory	28,000	8,400	10,080	9,520
Utilities	118,720	34,720	44,800	39,200
Employment taxes	63,840	18,480	24,528	20,832
General office—other*	84,000	20,160	33,600	30,240
Total administrative expenses	$ 428,960	$ 118,720	$ 169,008	$ 141,232

*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 $12,320 per quarter. The general manager of the North Store would continue to earn her normal salary of $13,440 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 $4,480 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 $6,720 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?

Please show work.

Accepted Answer

Employment taxes refers to the form of additional tax imposed on the income of an employee which…