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

Question

Quizplus · Accepted Answer

If the cantina is eliminated, the net income will decline by $25,000 because the cantina's contribution margin of $25,000 (Sales $200,000 - Variable costs $160,000 - Direct fixed costs $15,000) will be lost, while the allocated fixed costs of $37,500 will remain with the restaurant.

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