Loren's Lawn and Gardening performs various lawn and garden maintenance activities, including lawn mowing, tree and shrub
Question:
Loren's Lawn and Gardening performs various lawn and garden maintenance activities, including lawn mowing, tree and shrub pruning, fertilizing, and treating for pests. Unlike other lawn and garden businesses in the city, Loren also specializes in landscape design and planting. Loren is pleased that his design specialty is so much in demand. However, he is concerned because profits have been falling, even though sales have been growing over the past few years. In an effort to better understand why profits are falling, Loren prepared the following product-line income statement:
The lawn mowing business involves mowing lawns and trimming edges for customers who generally sign up for the season and pay a flat fee based on the surface area mowed and trimmed. The layout design business involves both designing a garden and lawn layout and installing the design. Other maintenance includes tree and shrub pruning and application of chemicals. The direct costs for each line of business are the costs of the materials and wages of the people who work in that line of business. The remaining costs consist mainly of equipment costs but also include office costs. After some deliberation, Loren decided to allocate the remaining costs of \(\$ 375,000\) on the basis of revenue, reasoning that revenue is a measure of equipment use.
Required
a. Based on this product-line income statement, which business is Loren likely to focus his efforts on? What is the likely result?
A further analysis of the allocated costs produced the information in the following table. General business costs are \(\$ 50,000\), and the remaining \(\$ 325,000\) are equipment costs. The trucks are shared equally by all the segments, but the other equipment is used by only one segment.
b. Prepare a new product-line income statement similar to Exhibit 2-23.
c. What advice do you have for Loren?
d. Suppose Loren currently sells 5,750 units of lawn mowing, 450 units of layout design, and 1,500 units of other maintenance. Assuming the sales mix remains the same, what is Loren's breakeven point in total units of service? Given this breakeven point, what are the associated breakeven points for the individual services?
Step by Step Answer:
