Elora Hotel's restaurant provides 3 services namely, breakfast, lunch, and dinner services. The accountant has...
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Accounting
Elora Hotel's restaurant provides 3 services namely, breakfast, lunch, and dinner services. The accountant has prepared a segmented contribution margin income statement for the past year based on the 3-meal periods, as shown below. The Hotel manager is concerned about the lunch service, as it has been showing a loss for the past few years.
| Breakfast | Lunch | Dinner | Total | |||||||
| Sales | $ | 419,000 | $ | 740,000 |
| $ | 426,000 | $ | 1,585,000 | |
| Less: Variable expenses | 241,000 | 287,000 | 257,000 | 785,000 | ||||||
| Contribution margin | 178,000 | 453,000 | 169,000 | 800,000 | ||||||
| Less: Fixed expenses | 118,000 | 508,000 | 107,000 | 733,000 | ||||||
| Net operating income (loss) | $ | 60,000 | $ | (55,000) | $ | 62,000 | $ | 67,000 | ||
Required:
A study indicates that 40% of the fixed costs of lunch services are common costs, so will continue even if the Lunch service is dropped. In addition, the elimination of the Lunch service will result in a 10% increase in the sales of the Breakfast service and a 15% increase in Dinner service. What will be effect on Net operating income if lunch service is dropped,
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