Chapter 1, Problem 43P

Cost Data for Managerial Purposes

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

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

1. b.       Should Kate discontinue the lawn service?
2. c.       Are there factors other than the differential costs and revenues that Kate should consider?