Question

Mel’s Diner owns a single restaurant, which has a cantina primarily used to seat patrons while they wait on their tables. The company is considering eliminating the cantina. Segmented contribution income statements are as follows and fixed costs applicable to both segments are allocated on the basis of square footage.
Restaurant Cantina Total
Sales $800,000 $200,000 $1,000,000
Variable costs 475,000 160,000 635,000
Direct fixed costs 50,000 15,000 65,000
Allocated fixed costs 212,500 37,500 250,000
Net income $ 62,500 ($ 12,500) $50,000
1. What effect will occur if Mel’s Diner eliminates the cantina if there is no effect on restaurant sales?
a. Net income will be $62,500.
b. Net income will increase by $12,500.
c. Net income will decrease to $37,500.
d. Net income will decline by $25,000.

Answer 1

Answer: Thecorrect answer is b