Question

KC Services provides landscaping services in Edison. Kate Chen, the owner, is concerned about the recent losses the company has incurred and is considering dropping its lawn services, which she feels are marginal to the company's business. She estimates that doing so will result in lost revenues of $150,000 per year (including the lost tree business from customers who use the company for both services). The present manager will continue to supervise the tree services with no reduction in salary. Without the lawn business, Kate estimates that the company will save 15 percent of the equipment leases, labor, and other costs. She also expects to save 20 percent on rent and utilities. Required: a. Prepare a report of the differential costs and revenues if the lawn service is discontinued. (Enter loss amount with a minus sign.) KC SERVICES Annual Income Statement Before Dropping Service $ 912,000 After Dropping Service Sales revenue Costs Equipment leases Labor Utilities Rent Other costs Manager's Salary Total costs Operating profit (loss) 360,000 288,000 48,000 96,000 48,000 120,000 960,000 (48,000) $ $ b. Should Kate discontinue the lawn service? Yes O No

Answer 1

The answer has been presented in the supporting sheet. For detailed answer refer to the supporting sheet.

Answer 2 KC SERVICES Annual Income Statement After Dropping Before Dropping Service Service Sales revenue 912000 762000 (912000-150000) Costs Equipment leases 360000 306000 (360000*(1-15%)) 10 Labor 288000 244800 (288000*(1-15%)) 11 12 Utilities 48000 38400 (48000*(1-20%)) 13 14 Rent 96000 76800 (96000*(1-20%)) 15 16 Other costs 48000 40800 (48000*(1-15%)) 17 Manager Salary 18 120000 120000 19 Total Costs 960000 826800 20 Operating profit (loss) -48000 -64800 21 22 part 2) 23 The correct answer is NO 24 It should not discontinue the lawn services as it leads to increase in operating loss