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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