Peter John Star, owner of The Big Star Hotel, is confused by the fully allocated financial statements that suggest The Big Star Hotel's lounge is losing money. As he sees it there are three alternatives:

1. Continue the lounge operation as is.

2. Close the lounge and expand the restaurant.

3. Lease the space to Philip, Inc., a management company.

The following table summarizes the Big Star Hotel's fully allocated monthly income statements.

Revenues	Rooms	Restaurant	Lounge	Total
	$250,000	$100,000	$40,000	$390,000
Departmental Expenses*	100,000	70,000	20,000	190,000
Departmental Profit	150,000	30,000	20,000	200,000
Allocated Overhead	100,000	25,000	30,000	155,000
Pretax income	$50,000	$5,000	($10,000)	45,000
Income Taxes				20,000
Net Income				$25,000

*All departmental expenses are assumed to be variable.

Additional Information:

1. Closing the lounge would reduce monthly overhead costs by $10,000. Leasing the lounge Philip, Inc., would reduce monthly overhead costs by $5,000

2. The Space can be leased to Philip, Inc., for 10 percent of sales. Philip, Inc. is a reputable operator, and Peter John believes that it will operate the lounge as effectively as The Big Star Hotel has done in the past. Annual forecasted lounge sales are expected to be $550,000.

3. If the lounge is closed, room profits are expected to decrease by 2 percent, while food departmental sales are expected to increase by 20 percent.

4. The cost to convert the lounge for alternative use is expected to be $60,000. Assume that the life of the equipment is five years, and that it will have no salvage value.

5. If the lounge is closed, the unneeded equipment can be sold on a contract over five years and $500 will be received each month.

Required:

Based on the above, advise Peter John Star. Use relevant numbers to support your recommendation.