Johnny’s Bar and Restaurant (JBR) offers three areas to its customers: bar, restaurant, and games. Johnny is concerned about the following division income statement recently prepared by his accountant:

Johnny feels that these results confirm his intuition that the games area should be closed and the restaurant and bar areas expanded. 

Required 

(a) Based on this information, would you recommend that Johnny close the games area? 

(b) Suppose now that the fixed costs in the above exhibit are comprised of two components: costs that can be eliminated if each area is closed and ongoing costs that can only be avoided if JBR is closed. These latter costs are allocated based on floor space occupied. Given the further analysis by Johnny’s accountant provided in the following exhibit, what recommendation would you make now about the games room?  

(c) Assume now that if the games area is closed and its space is reallocated equally to the restaurant and bar. Sales in each area would increase by 10%. What recommendation would you make about the games room?

Transcribed Image Text:

Revenue... Variable costs.. Contribution margin Fixed cost...... Division contribution.. RESTAURANT $220,000 80,000 $140,000 120,000 $ 20,000 BAR $180,000 60,000 GAMES $ 40,000 20,000 $120,000 $ 20,000 70,000 45,000 $ 50,000 $(25,000) TOTAL $440,000 160,000 $280,000 235,000 $ 45,000