Fundamentals of Cost Accounting 3rd Edition by William N. Lanen, Shannon W. Anderson, Michael Maher

Exercise 25

Cost Data for Managerial Purposes

Pete’s Taxi&Limo provides transportation services in and around Centerville. Its profits have been declining, and management is planning to add a package delivery service that is expected to increase revenue by $400,000 per year. The total cost to lease the necessary package delivery vehicles from the local dealer is $30,000 per year. The present manager will continue to supervise all services at no increase in salary. Due to expansion, however, the labor costs and utilities would increase by 50 percent. Rent and other costs will increase by 20 percent.

	A	B	C
1	PETE’S TAXI&LIMO
2	Annual Income Statement before Expansion
3
4	Sales revenue	$ 1,216,000
5	Costs
6	Vehicle leases	480,000
7	Labor	384,000
8	Utilities	64,000
9	Rent	128,000
10	Other costs	64,000
11	Manager’s salary	192,000
12	Total costs	$ 1,312,000
13	Operating profit (loss)	$ (96,000)
14

Required

a.Prepare a report of the differential costs and revenues if the delivery service is added.(Hint:Use the format of Exhibit 1.3.)

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b.Should management start the delivery service?

Step 1 of 2

a.