Homework Answers
| Alterenative 1: Continue the lounge operation as is | Currency | $ | ||
| Room | Restaurent | Lounge | Total | |
| Revenue | 250,000.00 | 100,000.00 | 40,000.00 | 390,000.00 |
| Departmental Expense | 100,000.00 | 70,000.00 | 20,000.00 | 190,000.00 |
| Departmental Profit | 150,000.00 | 30,000.00 | 20,000.00 | 200,000.00 |
| Allocated Overhead | 100,000.00 | 25,000.00 | 30,000.00 | 155,000.00 |
| Pretax Income | 50,000.00 | 5,000.00 | -10,000.00 | 45,000.00 |
| Alterenative 2: Close the lounge and expand the Restaurent | ||||
| Room | Restaurent | Launge | Total | |
| Departmental Profit | 147,000.00 | 36,000.00 | 0 | 183,000.00 |
| (150000-2%*150000) | (30000+20%*30000) | |||
| Sale of Equipment | - | - | 500 | 500.00 |
| Allocated Overhead | 100,000.00 | 25,000.00 | 20,000.00 | 145,000.00 |
| Pretax Income | 47,000.00 | 11,000.00 | -19,500.00 | 38,500.00 |
| Alterenative 3: Lease the space to Philip Inc., a management company | ||||
| Room | Restaurent | Launge | Total | |
| Departmental Profit | 150,000.00 | 30,000.00 | - | 180,000.00 |
| Lease income(10% of $550000)/12 | - | - | 4,583.33 | 4,583.33 |
| Cost to convert i.e. depreciation(60000/5/12) | - | - | 1,000.00 | |
| Allocated Overhead | 100,000.00 | 25,000.00 | 25,000.00 | 150,000.00 |
| Pretax Income | 50,000.00 | 5,000.00 | -21,416.67 | 33,583.33 |
| Conclusion: Peter john Star should continue to operate the lounge as the pretax income amounting to $45,000/- is the highest in this alternative. |
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