Question
A downtown restaurant added an ice cream counter to its operations for the spring and summer. The owner wished to evaluate the profitability of the
A downtown restaurant added an ice cream counter to its operations for the spring and summer. The owner wished to evaluate the profitability of the counter and received the following statement from his accountant:
Ice cream sales |
| $33,750 |
Cost of goods sold |
| 15,000 |
Gross margin |
| 18,750 |
Operating expenses: |
|
|
Wages of counter servers * | $9,000 |
|
Napkins and plastic spoons counter service | 3,000 |
|
Amortization expense- freezer (freezer used only for ice cream counter) | 500 |
|
Amortization expense - building (allocated based on square footage used by ice cream counter) | 3,000 |
|
Restaurant managers salary (allocated based on sales revenues) | 4,000 |
|
Total operating expenses |
| $19,500 |
Loss |
| $(750) |
The owner is disappointed by the results; the counter had been quite popular in attracting customers. However, he does not wish to incur a loss so has decided not to open the ice cream counter next summer. * The wages are for students hired to work only at the ice cream counter. Required: Is the owners decision to close the ice cream counter correct? Calculate the advantage or disadvantage if the counter is closed. Show your work.
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