Penny Farthing, proprietor of the Healthy Holiday Resort, had generally been satisfied with the results of her resort in past years. However, she had felt for some time that business always seemed to be a little quiet towards the end of each financial year ending on 30 June. As a matter of curiosity, she had her accountant prepare an analysis of the last financial year’s results by quarters. The analysis yielded the figures set out below.

The analysis revealed what Penny had suspected. The resort was running at a loss for the final quarter of the year. She then reasoned that she could either stop trading for the unprofitable quarter and take her family on holiday to somewhere cooler, or earn some additional money by being a tour guide in the nearby national park.
Her accountant determined that, if the resort closed for the fourth quarter, fourth‐quarter expenses would be affected in the following ways. Wages and salaries included an unavoidable $30 600 fixed component;
interest on loan and lease payments would still need to be paid; 40% of advertising costs were fixed; insurance premiums would reduce by $960; 60% of maintenance costs could be saved; a minimum electricity charge of $1050 would still apply; depreciation of $1680 would still need to be charged.
Required

(a) Should Penny close her resort in the fourth quarter and take her family on holiday? Explain why.

(b) Should Penny close her resort in the fourth quarter and seek employment as a tour guide? Explain your conclusion.

Transcribed Image Text:

INCOME Sales revenue EXPENSES Advertising Wages and salaries Lease of land Maintenance Electricity Insurance HEALTHY HOLIDAY RESORT Income Statement for the year ended 31 December 2020 (total and by quarter) Total 1st quarter 2nd 3rd quarter quarter 4th quarter $884870 $226990 $294620 $237 600 $125 660 26390 476250 126720 12650 104540 21 120 3160 26 400 5280 6330 120380 8450 142560 7390 4220 125 660 87 650 31 680 31 680 31 680 31 680 4220 30620 5280 3160 27 460 5280 2110 20060 5280