SITUATION II: KEEP OR DROP A PRODUCT/SEGMENT For the past two years, Tom has been operating an online platform through their website that allows customers to place orders online and have the food delivered to them within 45 minutes. The orders are then prepared in the same kitchen by the same staff operating the restaurant. The order is then delivered by a delivery person with the Tom's motorcycle that was purchased for this segment. The online delivery platform is managed from a small office located at the back of the restaurant. Tom's manager, Mr. Louis, is considering dropping this segment as he believes it is not profitable. The maintenance of the IT platform has been expensive, and he also believes that the online orders take up a significant portion of his time while making up a small portion of the revenues. Louis believes his time could be put to better use with other projects and initiatives for the Tom as well as managing the current operations. Louis indicates that staff turnover has been higher this past year and he feels partly responsible as he has not been able to be very involved with supervising and coaching the staff. The feedback on the online the platform has been good and he noted that many new customers of the caf indicated that they discovered the caf after they saw the website and ordered delivery from the online platform. Louis provides you with the following financial information of the Tom's Cater and asks you to help him decide whether they should keep or drop the online delivery segment. Additional information about the restaurant and the online delivery segment is provided on the next page. REQUIRED: 1. Identify the relevant costs to the keep or drop decision and prepare a computation of the loss/gain that would result from dropping the online segment. 2. What qualitative factors would you consider in this decision? FINANCIAL INFORMATION- Tom's Catering Notes: The Salaries and Advertising expenses are direct and traceable costs of each segment. Another common fixed costs were allocated based on the proportion of the square footage of the building occupied by each segment. Manager salary is fixed and their compensation has been allocated to each segment IT Maintenance is only needed for the online service, and it can be avoided. Catering Caf Online Order/Delivery Total Sales $1,125,000 $365,000 $150,000 Variable Costs $689,000 $205,000 $ 120,000 $1,640,000 $1,014,000 Contribution Margin $436,000 $160,000 $30,000 Fixed Expenses Salaries Advertising Utilities $ 189,250 $7,500 $ 25,600 $500 $12,000 $ 500 $ 626,000 $226,850 $8,500 $18,375 $3,675 $2,500 $ 24,550 Depreciation $ 41,250 $ 8,250 $5,500 $ 55,000 Insurance - Building $9,000 $ 1,800 $1,200 $12,000 Manager Salary $ 42,000 $10,500 $15,000 $67,500 IT Maintenance $ 20,000 $20,000 Profit $128,625 $ 109,675 $ (26,700) $211,600