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Mel's Diner owns a single restaurant, which has a cantina primarily used to seat patrons while they wait on their tables. The company is considering
- Mel's Diner owns a single restaurant, which has a cantina primarily used to seat patrons while they wait on their tables. The company is considering eliminating the cantina. Segmented contribution income statements are as follows and fixed costs applicable to both segments are allocated on the basis of square footage.
RestaurantCantinaTotal
Sales$800,000$200,000$1,000,000
Variable costs475,000160,000635,000
Direct fixed costs50,00015,00065,000
Allocated fixed costs212,50037,500250,000
Net income$62,500($ 12,500)$50,000
What effect will occur if Mel's Diner eliminates the cantina if there is no effect on restaurant sales?
Net income will increase by $12,500.
Net income will decrease to $37,500.
Net income will decline by $25,000.
Net income will be $62,500.
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