Rockwell Company 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 and adding more dining tables. Segmented contribution income statements are as follows and fixed costs applicable to both segments are allocated on the basis of sales.
|
Restaurant |
Cantina |
Total |
| Sales |
$800,000 |
$200,000 |
$1,000,000 |
| Variable costs |
475,000 |
160,000 |
635,000 |
| Direct fixed costs |
50,000 |
15,000 |
65,000 |
| Allocated fixed costs |
212,500 |
37,500 |
250,000 |
| Net Income |
$ 62,500 |
($12,500) |
$50,000 |
What financial effect will occur to profit if Rockwell eliminates the cantina but no more dining customers are served?
|
Net income will decline by $25,000.
|
|
Net income will be $50,000.
|
|
Net income will increase by $12,500.
|
|
Net income will decrease to $37,500
|