Reference no: EM133001145

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.

                                     Restaurant                        Cantina                  Total
Sales                               $800,000                       $200,000            $1,000,000
Variable costs                      475,000                         160,000              635,000
Direct fixed costs                  50,000                           15,000              65,000
Allocated fixed costs               212,500                       37,500              250,000
Net income                             $ 62,500                     ($ 12,500)             $ 50,000

Problem 1: What effect will occur if Mel's Diner eliminates the cantina if there is no effect on restaurant sales?

Option 1: Net income will increase by $12,500.
Option 2: Net income will decrease to $37,500.
Option 3: Net income will decline by $25,000.
Option 4: Net income will be $62,500.