Emergency Roadside Maintenance (ERSM) is an on-call mechanic and tow company tha
ID: 2571251 • Letter: E
Question
Emergency Roadside Maintenance (ERSM) is an on-call mechanic and tow company that works in the area surrounding Denver, CO. The majority of ERSM customers have small vehicles that have difficulty with the steep grade of the mountain passes. ERSM also currently offers their services to large commercial vehicles. However, the commercial vehicle services have recently reflected net losses. The following infromation relates to the costs involved servicing commercial vehicles:
- Revenue: $150/service
- Direct Labor: 5 hours @ $20/hour
- Supplies (gas, other vehicle fluids): $60/service
- Office scheduling expenses (treated as allocation of fixed overhead): $60/service
- Average number of commercial services performed per month: 250
Management is considering discontinuing the commercial vehicle service segment of their business. By how much would Operating Income per month increase or decrease if this segment were dropped?
Explanation / Answer
* Total Revenue genrated from Commercial Vehicles Service in a Month $ 37 500 (250 Service * $150 Revenue per Service)
Less: Direct Labour (250 *5hours per Service * $20 per hour cost) $ 25,000
Suppiles (Gas, other) (250 * $60 per Service) $ 15,000
Office Schedulling Expenses (Fixed Overhead) (250 * $60 per Service) $ 15,000
Net Gross Loss From Commercial Vehicles Service ($ 17 500)
Add Office Schedulling Expenses (Fixed Overhead)* $ 15 000
increase in Operating Income per month** $ 2,500
* Office Fixed Overhead Recovery from commercial vehicle service segment is recover from other services because company is discontinuing the commercial vehicle service segment so there will be no incrase in an operating profit of that amount thats why it is added back for the calculation for the Operationg income Effect.
** The answer come nagative $2500 but it result into increase in Operating Income per month because now onwards company not bare in Net loss from the the commercial vehicle service segment because they are discontinuing that Segment.
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