Question
Eliminating a product line (LO2, LO3, Appendix B). Spring Fresh provides commercial laundry and dry-cleaning services to local hospitals, hotels, and restaurants. Management believes that
Eliminating a product line (LO2, LO3, Appendix B). Spring Fresh provides commercial laundry and dry-cleaning services to local hospitals, hotels, and restaurants. Management believes that the dry-cleaning business is a loser, even though dry-cleaning operations yield a high contribution margin. Moreover, based on summary financial data from the most recent year of operations (presented here) management is seriously considering getting out of the dry-cleaning business.
Laundry Dry Cleaning Total
Revenue $3,000,000 $1,000,000 $4,000,000
Variable costs $1,000,000 $200,000 $1,200,000
Contribution margin $2,000,000 $800,000 $2,800,000
Traceable fixed costs $1,000,000 $500,000 $1,500,000
Common fixed costs* $500,000 $500,000 $1,000,000
Profit $500,000 ($200,000) $300,000
*These costs relate to the sales force, reception, and delivery trucks that are common to both lines of business. Management has arbitrarily allocated an equal amount to each line.
a. Assume that common fixed costs would decrease by $200,000 if the dry-cleaning business were closed. By how much will Spring Freshs profit increase or decrease if it closes the dry-cleaning operations?
b. Suppose that closing the dry-cleaning business would increase overall laundry revenue by 10%. Specifically, while some customers would be lost because they value one-stop cleaning convenience, the sales force will be better able to focus its efforts because there will be only one product line. How does this information affect your answer to part (a)? That is, by how much will Spring Freshs profit increase or decrease if it closes the dry-cleaning operations?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
![blur-text-image](https://dsd5zvtm8ll6.cloudfront.net/includes/images/document_product_info/blur-text-image.webp)
Get Instant Access with AI-Powered Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
![blur-text-image](https://dsd5zvtm8ll6.cloudfront.net/includes/images/document_product_info/blur-subtext-image.webp)
Step: 3
![blur-text-image](https://dsd5zvtm8ll6.cloudfront.net/includes/images/document_product_info/blur-subtext-image.webp)
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started