Rose Inn Assignment

Sara Rose, owner of the Rose Inn, is confused by the fully allocated financial statements that suggest the Rose Inns lounge is losing money. As she sees it, there are three options:

1. Continue the lounge operation as is.
2. Close the lounge and convert the space to a small meeting room.
3. Lease the space to Bevco.

The following table summarizes the Rose Inns fully allocated monthly income statements:

	Rooms	Food	Lounge	Total
Department profit	$150,000	$30,000	$10,000	$190,000
Allocated overhead	100,000	25,000	15,000	140,000
Pretax income	$50,000	$5000	$(5,000)	50,000
Income taxes				20,000
Net Income				$30,000

• Closing the lounge would reduce overhead costs by $7,000. Leasing the lounge to Bevco would reduce overhead costs by $2,000.
• The space can be leased to Bevco for 5% of sales. Bevco is a reputable operator and Sara Rose believes that it will operate the lounge as effectively as Rose Inn has done in the past. Annual forecasted lounge sales are expected to be $150,000.
• If the lounge is closed, room profits are expected to decrease by 2%, while food department profits are expected to increase by 20%.
• The cost to convert the lounge for alternative use is assumed to be equal to the market value of the lounge equipment.
• The lounge space, if used for small meetings, is expected to yield pretax profits of $3,000.

Based on the information provided, recommend the best option to Sara Rose and provide justification.