Elora Hotel's restaurant provides 3 services namely, breakfast, lunch, and dinner services. The accountant has prepared a segmented contribution margin income statement for the past year based on the 3-meal periods, as shown below. The Hotel manager is concerned about the lunch service, as it has been showing a loss for the past few years. Sales Less: Variable expenses Contribution margin Less: Fixed expenses Net operating income (loss) Breakfast $ 419,000 $ 241,000 Net operating income Lunch 740,000 287,000 by Dinner Total $426,000$ 1,585,000 178,000 118,000 $ 60,000 $ (55,000) $ 62,000 $ 453,000 508,000 257,000 169,000 107,000 Required: A study indicates that 40% of the fixed costs of lunch services are common costs, so will continue even if the Lun service is dropped. In addition, the elimination of the Lunch service will result in a 10% increase in the sales of the Breakfast service and a 15% increase in Dinner service. What will be effect on Net operating income if lunch sen is dropped, 785,000 800,000 733,000 67,000
Cost-Volume-Profit Analysis
Cost Volume Profit (CVP) analysis is a cost accounting method that analyses the effect of fluctuating cost and volume on the operating profit. Also known as break-even analysis, CVP determines the break-even point for varying volumes of sales and cost structures. This information helps the managers make economic decisions on a short-term basis. CVP analysis is based on many assumptions. Sales price, variable costs, and fixed costs per unit are assumed to be constant. The analysis also assumes that all units produced are sold and costs get impacted due to changes in activities. All costs incurred by the company like administrative, manufacturing, and selling costs are identified as either fixed or variable.
Marginal Costing
Marginal cost is defined as the change in the total cost which takes place when one additional unit of a product is manufactured. The marginal cost is influenced only by the variations which generally occur in the variable costs because the fixed costs remain the same irrespective of the output produced. The concept of marginal cost is used for product pricing when the customers want the lowest possible price for a certain number of orders. There is no accounting entry for marginal cost and it is only used by the management for taking effective decisions.
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