Chapter 16, Problem 16.29P

Problem 16.29

LO 2, 3

Continue or discontinue a segment? MMV, Inc., opened a chain of businesses several years ago that provide quick oil changes and other minor services in conjunction with a convenience operation consisting of a soup, sandwich, and snack bar. The strategy was that as customers brought autos in for oil changes, they would likely use the convenience operation to purchase a sandwich, bowl of soup, beverage, or some other snack while they were waiting for the work to be completed on their autos. The oil change operation occupies 75% of the facility and includes three service bays. The soup, sandwich, and snack bar occupies the remaining 25%. A general manager is responsible for the entire operation, but each segment also has a manager responsible for its individual operation.

Recently, the following annual operating information for the soup, sandwich, and snack bar at one of MMV’s locations caught the general manager's attention. Sales for the year were $120,000, and cost of sales (food, beverages, and snack items) are 40% of sales revenue. Operating expense information for the convenience operation follows:

Food service items (spoons, napkins, etc.)	$ 1,800
Utilities	3,600
Wages for part-time employees	24,000
Convenience operation manager’s salary	33,000
General manager’s salary	9,000
Advertising	10,800
Insurance	6,000
Property taxes	1,500
Food equipment depreciation	3,000
Building depreciation	7,500

While investigating these operating expenses, MMV, Inc. determines the following:

• Utilities are allocated to each segment based on square footage; however, 50% of the amount allocated to the soup, sandwich, and snack bar results from operating the food equipment.
• The general manager’s salary is allocated between the segments based on estimated time spent with each operation. It is determined that 20% of the general manager’s time is spent with the convenience operation.
• Advertising is allocated to each segment equally but could be reduced by $2,700 if MMV decided to advertise only the auto services.
• Insurance is allocated to each segment based on square footage, but only 25% of the amount allocated to the soup, sandwich, and snack bar results directly from its operation.
• Property taxes and building depreciation are allocated to each segment based on square footage.

Required:

1. From the preceding information, calculate the operating income from the soup, sandwich, and snack bar operation that has
caught the general manager’s attention.

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Identify whether each of these operating expenses is relevant to the decision of discontinuing the soup, sandwich, and snack bar operation.

If MMV, Inc., discontinues the soup, sandwich, and snack bar operation, how much will operating income increase or decrease for this location?

Should MMV continue or discontinue the soup, sandwich, and snack bar operation at this location? Consider possible opportunities for the use of this space in your response.