KC Services provides landscaping services in Edisont. Kate Chen,, the owner, is concerned about the recent losses the company has incurred and is considering dropping its lawn services

KC Services provides landscaping services in Edisont. 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 $51,500 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 21 percent on rent and utilities.

KC SERVICES Annual Income Statement (Before Dropping Lawn Services)
Sales revenue	$	316,000
Costs
Equipment leases	$	192,000
Labor		32,500
Utilities		20,000
Rent		31,200
Other costs		15,500
Manager’s salary		56,800
Total costs	$	348,000
Operating profit (loss)	$	(32,000)

Required :

a.	Prepare a report of the differential costs and revenues if the lawn service is discontinued. (Loss amounts shoud be indicated by minus sign.)

rev: 02_21_2014_QC_45747, 02_24_2014_QC_45747


Explanation:

a.

KC SERVICES Annual Income Statement
	Status Quo:      With Lawn      Service		Alternative:        Without Lawn     Service				Difference
Sales revenue		$ 316,000		$ 264,500		$ (51,500)	(given)
Costs
Equipment leases		192,000		163,200		(28,800)	(= 15% x $192,000)
Labor		32,500		27,625		(4,875)	(= 15% x $32,500)
Utilities		20,000		15,800		(4,200)	(= 21% x $20,000)
Rent		31,200		24,648		(6,552)	(= 21% x $31,200)
Other costs		15,500		13,175		(2,325)	(= 15% x $15,500)
Manager's salary		56,800		56,800		0
Total costs		$ 348,000		$ 301,248		$ (46,752)
Operating profit (loss)		$ (32,000)		$ (36,748)		$ (4,748)

Equipment leases: 15% x $192,000 = 163,200

Labor: 15% x $32,500 = 27,625

Utilities: 21% x $20,000 = 15,800

Rent: 21% x $31,200 = 24,648

Other costs: 15% x $15,500 = 13,175

b.

The decision to drop the lawn service results in a differential loss of $4,748 [=$(32,000) – $ (36,748)], so it is not profitable to drop that service. Note that only differential costs and revenues figured in the decision. The manager's salary did not change, so it did not affect the decision.