Landscaping Pros (LP) is a yard and lawn maintenance company. Up to now, they ha

Question

Landscaping Pros (LP) is a yard and lawn maintenance company. Up to now, they have received significant business from both commercial and private service contracts. However, management is concerned that the segment that services private homes has been experiencing losses, and is considering discontinuing that segment of the company.

Following is financial information for this past month:

Revenue from commercial: $20,000

Contribution margin percentage from commercial: 50%

Operating income/ (loss) from commercial: $5,000

Revenue from private: $1,000

Contribution margin percentage from private: (5%)

Operating income/ (loss) from private: ($900)

Management is concerned that some clients may cancel their commercial contracts if the private service is discontinued, because the owners of several of LP’s commercial clients use the private service as well. After conducting an analysis, management estimates that 5% of LP’s commercial revenue would be lost if the private service were discontinued.

By how much would Operating Income change if the private service line were dropped?

Explanation / Answer

Current total operating income of Landscaping Pros (LP)=5000-900=4100 Revised operating income: Revenue (20000*0.95) 19000 Contribution (19000*50%) 9500 Less: Fixed expenses (Note:1) 5000 Operating income 4500 Increase in operating income=4500-4100= $ 400 Note:1 Fixed expenses: Old contribution of Commercial (20000*50%) 10000 Less: operating income 5000 Fixed expenses 5000

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