The following table is the hotels the condensed monthly income statement Rooms

# The following table is the hotels the condensed

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The following table is the hotel’s the condensed monthly income statement: Rooms Food Lounge Total Sales \$300,000 \$100,000 \$100,000 \$500,000 Expenses 100,000 50,000 80,000 230,000 Department profit 200,000 50,000 20,000 270,000 Allocated overhead 100,000 40,000 30,000 170,000 Pretax income 100,000 10,000 (10,000) 100,000 Income taxes 25,000 Net income 75,000 Additional information: Closing the failing department would reduce overhead costs by \$10,000 per month. Leasing the space to Red Star would reduce the overhead costs by \$5,000 per month. The leasing fee is 6% of sales. Ulysses believes Red Star will be able to generate \$1,000,000 annual sales. If the failing department is closed, room sales are expected to decrease by 3%; however, restaurant sales are expected to increase by 10%. Assume that department expenses of rooms, food, and lounge are all variable except for \$50,000 of the rooms department expenses, which are fixed. Assume the cost to convert to restaurant space is \$48,000 and the equipment will have a 4-year useful lifetime. Assume the failing department’s equipment is sold will provide a cash flow of \$6,000. Required: Prepare a comparative analysis using only relevant numbers to determine which alternative is preferred. Show workings. 0900d1af3ab3d2e98b00010d50a3ea616c315cc2.docx Page 2 of 5
0900d1af3ab3d2e98b00010d50a3ea616c315cc2.docx Page 3 of 5 Continue Close & Convert Lease Departmental Profit \$20,000 \$ - \$ - Reduced overhead - 10,000 5,000 Leasing Revenue - - 5 ,000 Cost to expand - - (1,000) Profit lost in rooms (7,500) Profit gained in food 5,000 Salvage of lounge 500 Differential Cost 20,000 7,000 10,000
Problem 3

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• Fall '16
• Revenue, Generally Accepted Accounting Principles, Red Star, Sabrina Rose