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 $100,000 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 , 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.
KC SERVICES
Annual Income Statement
(Before Dropping Lawn Services)
Sales revenue ............. $ 608,000 CostsEquipment leases .......... $ 240,000
Labor ................ 192,000
Utilities ................ 32,000
Rent ............... 64,000
Other costs ............. 32,000
Manager s salary .......... 80,000
Total costs .............. $ 640,000
Operating profit (loss) ........ $ (32,000)
b. Should Kate discontinue the lawn service?
c. Are there factors other than the differential costs and revenues that Kate should consider?
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