3-32 Drop a division relevant cost Johnny's Bar and Restaurant (JBR) offers three areas to its cus tomers: bar, restaurant, and games. Johnny is concerned about the following division income statement recently prepared by his accountant: Revenue.... Variable costs.. Contribution margin ... Fixed cost...... Division contribution .... Revenue... Variable costs.. RESTAURANT $220,000 80,000 Contribution margin . . . . . Avoidable fixed cost $140,000 120,000 $ 20,000 Division contribution.... Fixed cost allocated .. Division contribution.... Johnny feels that these results confirm his intuition that the games area should be closed and the restaurant and bar areas expanded. RESTAURANT $220,000 80,000 BAR GAMES $180,000 $ 40,000 60,000 20,000 Required (a) Based on this information, would you recommend that Johnny close the games area? (b) Suppose now that the fixed costs in the above exhibit are comprised of two components costs that can be eliminated if each area is closed and ongoing costs that can only be avoide if JBR is closed. These latter costs are allocated based on floor space occupied. Given the further analysis by Johnny's accountant provided in the following exhibit, what recommen dation would you make now about the games room? $140,000 100,000 $120,000 70,000 $ 50,000 $(25,000) $ 40,000 20,000 $ 20,000 $ 20,000 45,000 BAR $180,000 60,000 $120,000 50,000 $ 70,000 20,000 $ 50,000 GAMES $ 40,000 20,000 TOTAL $440,000 160,000 $ 20,000 15,000 $280,000 235,000 $ 45,000 $ 5,000 30,000 $(25,000) TOTAL $440,000 160,000 $280,000 165,000 $115,000 70,000 $45,000 (c) Assume now that if the games area is closed and its space is reallocated equally to the restau rant and bar. Sales in each area would increase by 10%. What recommendation would you make about the games room?
3-32 Drop a division relevant cost Johnny's Bar and Restaurant (JBR) offers three areas to its cus tomers: bar, restaurant, and games. Johnny is concerned about the following division income statement recently prepared by his accountant: Revenue.... Variable costs.. Contribution margin ... Fixed cost...... Division contribution .... Revenue... Variable costs.. RESTAURANT $220,000 80,000 Contribution margin . . . . . Avoidable fixed cost $140,000 120,000 $ 20,000 Division contribution.... Fixed cost allocated .. Division contribution.... Johnny feels that these results confirm his intuition that the games area should be closed and the restaurant and bar areas expanded. RESTAURANT $220,000 80,000 BAR GAMES $180,000 $ 40,000 60,000 20,000 Required (a) Based on this information, would you recommend that Johnny close the games area? (b) Suppose now that the fixed costs in the above exhibit are comprised of two components costs that can be eliminated if each area is closed and ongoing costs that can only be avoide if JBR is closed. These latter costs are allocated based on floor space occupied. Given the further analysis by Johnny's accountant provided in the following exhibit, what recommen dation would you make now about the games room? $140,000 100,000 $120,000 70,000 $ 50,000 $(25,000) $ 40,000 20,000 $ 20,000 $ 20,000 45,000 BAR $180,000 60,000 $120,000 50,000 $ 70,000 20,000 $ 50,000 GAMES $ 40,000 20,000 TOTAL $440,000 160,000 $ 20,000 15,000 $280,000 235,000 $ 45,000 $ 5,000 30,000 $(25,000) TOTAL $440,000 160,000 $280,000 165,000 $115,000 70,000 $45,000 (c) Assume now that if the games area is closed and its space is reallocated equally to the restau rant and bar. Sales in each area would increase by 10%. What recommendation would you make about the games room?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:3-32
Drop a division relevant cost Johnny's Bar and Restaurant (JBR) offers three areas to its cus
tomers: bar, restaurant, and games. Johnny is concerned about the following division income
statement recently prepared by his accountant:
Revenue.
Variable costs.
Contribution margin
Fixed cost..
Division contribution.
Revenue
Variable costs
RESTAURANT
$220,000
80,000
Contribution margin
Avoidable fixed cost
$140,000
120,000
$ 20,000
Division contribution.
Fixed cost allocated
Division contribution.
RESTAURANT
$220,000
80,000
BAR
$180,000
60,000
Johnny feels that these results confirm his intuition that the games area should be closed and
the restaurant and bar areas expanded.
$140,000
100,000
$120,000
70,000
$ 50,000
Required
(a) Based on this information, would you recommend that Johnny close the games area?
(b) Suppose now that the fixed costs in the above exhibit are comprised of two components
costs that can be eliminated if each area is closed and ongoing costs that can only be avoide
if JBR is closed. These latter costs are allocated based on floor space occupied. Given the
further analysis by Johnny's accountant provided in the following exhibit, what recommen.
dation would you make now about the games room?
$ 40,000
20,000
$ 20,000
BAR
$180,000
60,000
GAMES
$ 40,000
20,000
$120,000
50,000
$ 20,000
45,000
$(25,000)
$ 70,000
20,000
$ 50,000
TOTAL
$440,000
160,000
GAMES
$ 40,000
20,000
$280,000
235,000
$ 45,000
$ 20,000
15,000
TOTAL
$440,000
160,000
$280,000
165,000
$ 5,000
$115,000
70,000
30,000
$(25,000) $ 45,000
(c) Assume now that if the games area is closed and its space is reallocated equally to the restau
rant and bar. Sales in each area would increase by 10%. What recommendation would you
make about the games room?
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