You have the following income statements for each of the four quarters of a restaurant operation:
|
1st Qtr. |
2nd Qtr. |
3rd Qtr. |
4th Qtr. |
|
|
Sales revenue |
$34,200 |
$44,800 |
$37,200 |
$20,300 |
|
Cost of sales |
(12800) |
(16,900) |
(14,700) |
(8400) |
|
Gross Margin |
$21400 |
$27900 |
$22500 |
$11900 |
|
Operating Expenses |
||||
|
Wages |
$ 9,800 |
$11,600 |
$10,200 |
$ 7,400 |
|
Supplies |
1,600 |
1,900 |
1,700 |
900 |
|
Advertising |
600 |
800 |
700 |
400 |
|
Utilities |
2,500 |
2,900 |
2,600 |
1,900 |
|
Maintenance |
300 |
400 |
300 |
200 |
|
Insurance |
500 |
500 |
500 |
500 |
|
Interest |
600 |
600 |
600 |
600 |
|
Depreciation |
400 |
400 |
400 |
400 |
|
Rent |
3000 |
3000 |
3000 |
3000 |
|
Total expenses |
$19300 |
$22100 |
$20000 |
$15300 |
|
Operating income (loss) |
$2,100 |
$5800 |
$2500 |
$3400 |
The owner is contemplating closing the restaurant in the fourth quarter in order to eliminate the loss and take a three-month vacation. The owner has asked for your help, and after an analysis of the fourth-quarter expenses, you determine the following:
Wages: $3,000 is a fixed cost of key personnel who would be kept on the payroll even if the operation were closed for three months.
Supplies: Cost varies directly with sales revenue; none of the supplies costs are fixed.
Advertising: Half of the cost is fixed, the rest is variable.
Utilities: Even if closed for three months, the restaurant will still require some heating; this is expected to cost $100 a month.
Maintenance: Some light maintenance work could be done during the closed period; estimated cost $100.
Insurance: Insurance cost will be reduced $200 if closed for three months.
Interest: Will still have to be paid, even if closed.
Depreciation: With less customer traffic and reduced wear and tear on equipment, there would be a 75 percent reduction in depreciation expense for the fourth quarter.
Rent: This is an annual expense of $12,000 that must be paid regardless of whether the restaurant is open or closed. Explain what advice you would give the owner.