3-32 Drop a division relevant cost Johnny's Bar and Restaurant (JBR) offers three areas to its cus tomers: bar, restaurant, and games. Johnny concerned about the following division income statement recently prepared by his accountant: RESTAURANT BAR GAMES TOTAL Revenue Variable costs $220,000 80,000 $180,000 $ 40,000 $440,000 60,000 20,000 160,000 Contribution margin $140,000 $120,000 $ 20,000 $280,000 Fixed cost.. 120,000 70,000 45,000 235,000 Division contribution. $ 20,000 $ 50,000 $(25,000) $ 45,000 Johnny feels that these results confirm his intuition that the games area should be closed and the restaurant and bar areas expanded. Required (a) Based on this information, would you recommend that Johnny close the games area? (b) Suppose now that the fixed costs in the above exhibit are comprised of two components costs that can be eliminated if each area is closed and ongoing costs that can only be avoided if JBR is closed. These latter costs are allocated based on floor space occupied. Given the further analysis by Johnny's accountant provided in the following exhibit, what recommen dation would you make now about the games room? RESTAURANT BAR GAMES TOTAL Revenue. Variable costs. Contribution margin Avoidable fixed cost $220,000 80,000 $140,000 100,000 $180,000 60,000 $120,000 Division contribution Fixed cost allocated $ 40,000 20,000 50,000 $ 70,000 20,000 $ 40,000 20,000 $ 20,000 15,000 $440,000 160,000 $280,000 165,000 Division contribution.. $ 20,000 $ 50,000 $ 5,000 30,000 $(25,000) $ 45,000 $115,000 70,000 (c) Assume now that if the games area is closed and its space is reallocated equally to the restau rant and bar. Sales in each area would increase by 10%. What recommendation would you make about the games room?