Buddy's Bar and GriX is organized into three operating units: a restaurant, a bar, and a...

  

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Buddy's Bar and GriX is organized into three operating units: a restaurant, a bar, and a games room. Exhibit 3-15 summarizes the results for the most recent year. Buddy is concerned about the continuing losses being reported by the games room and is con- sidering closing it and reallocating the floor space occupied by the games room to the restaurant and bar. A study of operations yielded the following results: 1. The fixed costs have two components: a. The first component is an allocation of the organization's general business costs of $340,000. These costs are allocated in proportion to the floor space occupied by each unit. The floor space occupied by the restaurant, bar, and games room is 1,000, 400, and 600 square meters, respectively. Sales Variable costs Fixed cost Profit RESTAURANT $1,200,000 700,000 320,000 $180,000 BAR $800,000 375,000 118,000 $307,000 GAMES ROOM $100,000 50,000 202,000 (5152,000) TOTAL $2,100,000 1,125,000 640,000 $335,000 b. The second component of fixed costs for each unit is the attributable fixed cost relating to rented equipment that can be avoided in full if the unit is closed. 2. If the games room is closed, 400 square meters of the freed up space will be allocated to the restaurant and 200 square meters will be allocated to the bar. Attributable fixed costs in the restaurant and in the bar will not increase if the area is expanded. 3. If the games room is closed and the restaurant is expanded, sales in the restaurant will increase by 10% primarily because the decrease in noise coming from the games room will attract more customers. Variable costs will increase in the same proportion. 4. A study of the bar customers suggests that the patrons of the games room account for about 50% of the bar sales and that half of these sales will be lost if the games room is closed. Variable costs will decrease in the same proportion. REQUIREMENT Based on the case above, should Buddy's Bar & Grill close the operations of the game room? Justify your answer with relevant costing analysis. Buddy's Bar and GriX is organized into three operating units: a restaurant, a bar, and a games room. Exhibit 3-15 summarizes the results for the most recent year. Buddy is concerned about the continuing losses being reported by the games room and is con- sidering closing it and reallocating the floor space occupied by the games room to the restaurant and bar. A study of operations yielded the following results: 1. The fixed costs have two components: a. The first component is an allocation of the organization's general business costs of $340,000. These costs are allocated in proportion to the floor space occupied by each unit. The floor space occupied by the restaurant, bar, and games room is 1,000, 400, and 600 square meters, respectively. Sales Variable costs Fixed cost Profit RESTAURANT $1,200,000 700,000 320,000 $180,000 BAR $800,000 375,000 118,000 $307,000 GAMES ROOM $100,000 50,000 202,000 (5152,000) TOTAL $2,100,000 1,125,000 640,000 $335,000 b. The second component of fixed costs for each unit is the attributable fixed cost relating to rented equipment that can be avoided in full if the unit is closed. 2. If the games room is closed, 400 square meters of the freed up space will be allocated to the restaurant and 200 square meters will be allocated to the bar. Attributable fixed costs in the restaurant and in the bar will not increase if the area is expanded. 3. If the games room is closed and the restaurant is expanded, sales in the restaurant will increase by 10% primarily because the decrease in noise coming from the games room will attract more customers. Variable costs will increase in the same proportion. 4. A study of the bar customers suggests that the patrons of the games room account for about 50% of the bar sales and that half of these sales will be lost if the games room is closed. Variable costs will decrease in the same proportion. REQUIREMENT Based on the case above, should Buddy's Bar & Grill close the operations of the game room? Justify your answer with relevant costing analysis.

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