The Santa Fe is a Californian hotel with three revenue-generating departments.

One of these is a foyer shop that has recorded a loss in each of the last three years. In the most recent year, the shop’s profit performance schedule was as follows.

Included in other expenses is an allocated hotel electricity expense of $7,500.
This overhead is allocated to the shop according to a complicated formula that recognises floor space as well as the hours that the shop is open. Of the $7,500 allocated, it is estimated that if the shop were to close, $3,000 in electricity would be saved. e other expenses also include $12,000 of allocated overheads pertaining to rent of the building and also maintenance of the hotel’s physical infrastructure. All of the remaining “other expenses” are directly traceable to the shop and would be eliminated if the shop were to close.

Required:
Prepare a financial analysis that demonstrates whether the shop should be closed.

Transcribed Image Text:

Sales $300,000 Cost of goods sold 185,000 Gross profit 115,000 Other expenses Net loss 126,000 $ (11,000)