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

Exercise 26

Cost Data for Managerial Purposes

Valley Lawn&Tree, Inc., provides landscaping services in Eastmont. Renee Moffo, 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 $50,000 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, Renee 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.

	A	B	C
1	VALLEY LAWN&TREE, INC.
2	Annual Income Statement
3	(Before Dropping Lawn Services)
4
5	Sales revenue	$ 304.000
6	Costs
7	Equipment leases	$ 120.000
8	Labor	96.000
9	Utilities	16.000
10	Rent	32.000
11	Other costs	16.000
12	Manager’s salary	40.000
13	Total costs	$ 320.000
14	Operating profit (loss)	$ (16.000)
15

Required

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

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b.Should Renee discontinue the lawn service?

Step 1 of 2

a.