You have the following income statements for each of the four quarters of a restaurant operation:

The owner is contemplating closing the restaurant in the fourth quarter in order to eliminate the loss and take a three-month vacation. The owner has asked for your help, and after an analysis of the fourth-quarter expenses, you determine the following:
■ Wages and salaries expense: $3,000 is a fixed cost of key personnel who would be kept on the payroll even if the operation were closed for three months.
■ Supplies expense: Cost varies directly with sales revenue; none of the supplies costs are fixed.
■ Advertising expense: Half of the cost is fixed; the rest of the cost is variable.
■ Utilities expense: Even if closed for three months, the restaurant will still require some heating; this is expected to cost $100 a month.
■ Maintenance expense: Some light maintenance work could be done during the closed period; estimated cost is $200.
■ Insurance expense: Insurance cost will be reduced 60% if closed for three months.
■ Interest expense: Will still have to be paid, even if closed.
■ Depreciation expense: With less customer traffic and reduced wear and tear on equipment, there would be a 75% reduction in depreciation expense for the fourth quarter.
■ Rent expense: This is an annual expense of $24,000 that must be paid, regardless of whether the restaurant is open or closed.
Explain what advice you would give the owner.LO1

Transcribed Image Text:

1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. Sales revenue $86,400 $97,000 $89,400 $46,400 Cost of sales (32,800) (35,900) (33,100) (18,100) $53,600 $61,100 $56,300 $28,300 Gross Margin Operating Expenses Wages & salaries expense $32,000 $35,900 $33,100 $17,800 Supplies expense 1,900 2,200 1,970 1,100 Advertising expense 900 900 900 600 Utilities expense 2,600 2,900 2,680 2,400 Maintenance expense 450 450 400 400 Insurance expense 1,200 1,200 1,200 1,200 Interest expense 750 750 750 750 Depreciation expense 700 700 700 700 Rent expense 6,000 6,000 6,000 6,000 Total operating expenses $46,500 $51,000 $47,700 $30,950 Operating income (loss) $ 7,100 $10,100 $ 8,600 ($ 2,650)