Landscaping Pros (LP) is a yard and lawn maintenance company. Up to now, they ha
ID: 2517090 • Letter: L
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: Commercial Service Line: Revenue from commercial: $20,000 Contribution margin percentage from commercial: 50% Operating income/ (loss) from commercial: $5,000 Private Service Line: Revenue from private: $1,000 . Contribution margin percentage from private: (596) .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 10% 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
Commercial Line Contribution margin = $20000 x 50% = $10,000
Operating Income = $5000
Hence, degree of Operating Leverage = Contribution margin / Operating Income = 10000/5000 = 2
Through this degree of operating leverage, change in Operating Income of commercial line can be calculated if the private line were dropped.
Decrease in revenues of commercial line = 10%
Degree of Operating Leverage = 2
Hence, Operating Income would decrease by 2 x 10% = 20%
New operating income would be = Old operating income - 20% = $5,000 - 20% = $4,000
Change in operating Income will be $5000 x 20% = $1,000 [Decrease]
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.