A. Should Penny close her resort in the fourth quarter and take her family on holiday? Explain
Question:
A. Should Penny close her resort in the fourth quarter and take her family on holiday? Explain why.
B. Should Penny close her resort in the fourth quarter and seek employment as a tour guide? Explain your conclusion.
Penny Farthing, proprietor of the Healthy Holiday Resort, had generally been satisfied with the results of her resort in past years. However, she had felt for some time that business always seemed to be a little quiet towards the end of each financial year ending on 30 June. As a matter of curiosity, she had her accountant prepare an analysis of the last financial year’s results by quarters. The analysis yielded the figures set out below:
HEALTHY HOLIDAY RESORT Income Statement for the year ended 31 December 2017 (total and by quarter) | ||||||||||||
Total | 1st quarter | 2nd quarter | 3rd quarter | 4th quarter | ||||||||
INCOME Sales revenue | $884 870 | $226 990 | $294 620 | $237 600 | $125 660 | |||||||
EXPENSES Advertising Wages and salaries Lease of land Maintenance Electricity Insurance Depreciation Interest on loan | 26 390 476 250 126 720 12 650 104 540 21 120 16 880 25 320 | 6 330 120 380 31 680 3 160 26 400 5 280 4 220 6 330 | 8 450 142 560 31 680 4 220 30 620 5 280 4 220 6 330 | 7 390 125 660 31 680 3 160 27 460 5 280 4 220 6 330 | 4 220 87 650 31 680 2 110 20 060 5 280 4 220 6 330 | |||||||
Total expenses | 809 870 | 203 780 | 233 360 | 211 180 | 161 550 | |||||||
PROFIT (LOSS) | $ 75 000 | $ 23 210 | $ 61 260 | $ 26 420 | $ (35 890) | |||||||
The analysis revealed what Penny had suspected. The resort was running at a loss for the final quarter of the year. She then reasoned that she could either stop trading for the unprofitable quarter and take her family on holiday to somewhere cooler, or earn some additional money by being a tour guide in the nearby national park.
Her accountant determined that, if the resort closed for the fourth quarter, fourth-quarter expenses would be affected in the following ways. Wages and salaries included an unavoidable $30 600 fixed component; interest on loan and lease payments would still need to be paid; 40% of advertising costs were fixed; insurance premiums would reduce by $960; 60% of maintenance costs could be saved; a minimum electricity charge of $1050 would still apply; depreciation of $1680 would still need to be charged.
Step by Step Answer:
Accounting
ISBN: 978-1118608227
9th edition
Authors: Lew Edwards, John Medlin, Keryn Chalmers, Andreas Hellmann, Claire Beattie, Jodie Maxfield, John Hoggett