You have the following monthly information about a large restaurant complex comprising three departm

You have the following monthly information about a large restaurant complex comprising three departments:

Dining

Coffee

Room

Shop

Lounge

Total

Sales revenue

$184,800

$135,600

$152,900

$473,300

Direct costs

(154,600)

(129,000)

(127,600)

(411,200)

Department income

$30,200

6600

$ 25,300

$62,100

Indirect costs

(52,100)

Operating income

$10,100

The owner wants to allocate indirect costs to each department based on

square footage to get a better picture of how each department is doing.

Dining room

1,200 sq. ft.

Coffee shop

840 sq. ft.

Lounge

960 sq. ft.

a. Allocate the indirect costs as indicated.

b. The owner has an offer from the souvenir store operator who is willing to rent the coffee shop space for $8,000 a year. Advise the owner whether to accept the offer.

c. Before making a final decision, the owner of the restaurant decides to evaluate the changes to indirect costs if the coffee shop space is rented.

Present

Costs if Coffee

Indirect Costs

Costs

Shop Rented

Administrative and general

$14,100

$13,400

Advertising and promotion

9,800

9,200

Utilities

4,500

4,300

Repairs and maintenance

4,200

3,900

Insurance

3,600

3,300

Interest

5,400

5,400

Depreciation

10,400

7,100

If the coffee shop is not operated, it is estimated that lounge revenue will decline by $13,600 a year and lounge direct costs will go down by $10,200. Dining room revenue and direct costs will not be affected. Should the owner accept the offer to rent out the coffee shop?

 

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