Continue or discontinue a segment? Mario opened a chain of businesses several years ago that provide quick oil changes and other minor services in conjunction with a convenience operation consisting of a soup, sandwich, and snack bar. The strat¬ egy was that as customers brought autos in for oil changes, they would likely use the convenience operation to purchase a sandwich, bowl of soup, beverage, or some other snack while they were waiting for the work to be completed on their autos.

The oil change operation occupies 75 percent of the facility and includes three service bays. The soup, sandwich, and snack bar occupies the remaining 25 percent. A general manager is responsible for the entire operation, but each segment also has a manager responsible for its individual operation.
Recently the following annual operating information for the soup, sandwich, and snack bar at one of Mario’s locations caught his attention. Sales for the year were $120,000, and cost of sales (food, beverages, and snack items) are 40% of sales revenue. Operating expense information for the convenience operation follows:

Food service items (spoons, napkins, etc.). $ 1,800 Utilities. 3,600 Wages for part-timeemployees. 24,000 Convenience operation manager'ssalary. 33,000 General manager’ssalary. 9,000 Advertising. 10,800 Insurance. 6,000 Propertytaxes. 1,500 Food equipmentdepreciation. 3,000 Buildingdepreciation. 7,500 While investigating these operating expenses, Mario determines the following:
• Utilities are allocated to each segment based on square footage; however, 50% of the amount allocated to the soup, sandwich, and snack bar results from operating the food equipment.
• The general manager’s salary is allocated between the segments based on estimated time spent with each operation. It is determined that 20% of the general manager’s time is spent with the convenience operation.
• Advertising is allocated to each segment equally but could be reduced by $2,700 if Mario decided to advertise only the auto services.
• Insurance is allocated to each segment based on square footage, but only 25% of the amount allocated to the soup, sandwich, and snack bar results directly from its operation.
• Property taxes and building depreciation are allocated to each segment based on square footage.
Required:

a. From the preceding information, calculate the operating income from the soup, sandwich, and snack bar operation that has caught Mario’s attention.

b. Identify whether each of these operating expenses is relevant to the decision of discontinuing the soup, sandwich, and snack bar operation.

c. If Mario discontinues the soup, sandwich, and snack bar operation, how much will operating income increase or decrease for this location?

d. Should Mario continue or discontinue the soup, sandwich, and snack bar operation at this location? Consider possible opportunities for the use of this space in your response.