The Queen's Arms Hotel's year-end sales and costs figures are in the table - all in local currency. The owner wants to close during low season, but the assistant manager suggests keeping open is better. Who is right? $$\begin{array} { | l | l | l | l | }
\hline & 9 \text { months } & 3 \text { months } & \text { Total } \
\hline \text { Sales } & 450,000 & 50,000 & 500,000 \
\hline \text { Direct costs } & 200,000 & 22,000 & 222,000 \
\hline \text { Contribution } & 250,000 & 28,000 & 278,000 \
\hline \text { Indirect costs } & 170,000 & 30,000 & 200,000 \
\hline \text { Operating income } & 80,000 & 2,000 & 78,000 \
\hline
\end{array}$$

Question

The Queen's Arms Hotel's year-end sales and costs figures are in the table - all in local currency. The owner wants to close during low season, but the assistant manager suggests keeping open is better. Who is right? $$\begin{array} { | l | l | l | l | } 
\hline & 9 \text { months } & 3 \text { months } & \text { Total } \
\hline \text { Sales } & 450,000 & 50,000 & 500,000 \
\hline \text { Direct costs } & 200,000 & 22,000 & 222,000 \
\hline \text { Contribution } & 250,000 & 28,000 & 278,000 \
\hline \text { Indirect costs } & 170,000 & 30,000 & 200,000 \
\hline \text { Operating income } & 80,000 & 2,000 & 78,000 \
\hline
\end{array}$$

Quizplus · Accepted Answer

From the table, we can see that the total operating income for the year is 78,000. If the hotel were to close during the 3-month low season, the sales and direct costs would both decrease by 50%. This would result in sales of 25,000 and direct costs of 11,000, leaving a contribution of 14,000. However, the fixed indirect costs would remain, resulting in a total operating income of only 2,000 for the 3-month period. Adding this to the operating income for the 9-month high season, we get a total operating income of 80,000, which is less than the total operating income for staying open all year (78,000). Therefore, the assistant manager is right and the hotel should stay open during the low season.

The Queen's Arms Hotel's Year-End Sales and Costs Figures Are