Mel's Diner Owns a Single Restaurant, Which Has a Cantina

question 76

Multiple Choice

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. $\begin{array}{lrrr}&\text { Restaurant }& \text { Cantina } &\text { Total }\\\text { Sales } & \$ 800,000 & \$ 200,000 & \$ 1,000,000 \\\text { Variable costs } & 475,000 & 160,000 & 635,000 \\\text { Direct fixed costs } & 50,000 & 15,000 & 65,000 \\\text { Allocated fixed costs } & 212,500 & 37,500 & 250,000 \\\text { Net income } & \$ 62,500 & (\$ 12,500) & \$ \$ 50,000\end{array}$ What effect will occur if Mel's Diner eliminates the cantina if there is no effect on restaurant sales?

• A)Net income will increase by $12,500.
• B)Net income will decrease to $37,500.
• C)Net income will decline by $25,000.
• D)Net income will be $62,500.

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