You have the following annual information about a restaurant complex consisting of three departments:

Contributory income Statement Dining Room Coffee Shop Lounge total

Sales revenue $194,800 $135,800 $152,800 $483,400

Direct Costs ( $154,400) ( 128,800 ) ( 124,600 ) ( 407,000)

Contributory income $40,400 $7,800 $28,200 $76,400

Indirect costs ( 52,000)

Operating income $24,000

The owner wants to allocate indirect costs quarterly to each department based on square footage to get a better picture of how each department is doing.

Dining room 2,200 sq. ft.

Coffee shop 840 sq. ft.

Lounge 960 sq.ft.

a. Allocate the indirect costs as indicated.

b. The owner has an offer from the souvenir store operator who is willing to rent the coffee shop space for $9,600 year. Advice the owner whether to accept the offer.

c. Before making a final decision, the owner of the restaurant decides to evaluate the changes to indirect costs if the coffee shop space is rented.

Indirect Costs Present Costs Costs if Coffee Shop Rented

Administrative and general $14,100 $13,200

Advertising and promotion 9,800 9,000

Utilities 4,500 4,100

Repair and maintenance 4,200 3,800

Insurance 3,600 3,100

Interest 5,400 5,400

Depreciation 10,400 7,100

If the coffee shop is not operated, it is estimated that lounge sales revenue will decline by $11,700 a year and lounge direct costs will go down by $8,100. Dining room sales revenue and direct costs will not be affected. Should the owner accept the offer to rent out the coffee shop?