(Product line) Support Services provides outsourcing services for three areas: payroll, general ledger (GL), and tax compliance. The company is currently contemplating the elimination of the GL area because it is showing a pre-tax loss. An annual income statement follows:

a. Should corporate management drop the GL area? Support your answer with appropriate schedules.

b. How would the decision affect the company’s pre-tax profit?

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SUPPORT SERVICES Income Statement by Service Line For the Year Ended July 31, 2006 (in thousands) Payroll $ 2,200 Sales Cost of sales Gross margin Avoidable fixed and variable costs Allocated fixed costs Total fixed costs Operating profit GL $1,600 (1,000) Tax $ 1,800 (1,400) (1,080) $ 800 $ 600 $ 720 $ 630 $ 725 $ 520 90 80 105 $ 720 $ 805 $ 625 $ 80 $ (205) 95 $ Total $ 5,600 (3,480) $ 2,120 $ 1,875 275 $ 2,150 $ (30)