Exercise 10-28 (Algorithmic)

Product line

Lakeland Financial 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.

Lakeland Financial Services

Income Statement by Service Line

For the Year Ended July 31, 2013

(in thousands)

___________________________________________________________________________________________________________________ Payroll_______GL_________Tax______Total_______________

Sales $ 4,394 $ 3,195$3,596$11,185

Cost of sales (2,818)_____(1,991)_____ (2,154)____ (6,963)_

Gross margin$1,576______$1,204_____$ 1,442___ $4,222_

Avoidable fixed and variable cost $1,268 $1,474 $1,046 $3,788

Allocated fixed costs 180 141 202523___

Total fixed cost $1,448$1,615 $1,248 $4,311_

Operating profit $ 128 $ (411) $ 194 $ (89)__

a. Should corporate management drop the GL area?

Yes

Gross margin GL services $_____________

Avoidable fixed and operating costs $_____________

Segment margin $_____________

b. If the GL area were dropped, how would the company?s pre-tax profit be affected?

The pretax profit of the company would

Increase by $______________

Check My Work Feedback

a. Compute the segment margin to see if this segment should be dropped. Remember to include only relevant costs that are avoidable if dropped. Those that will remain irrespective of dropping the segment will not be considered in the decision.

b. If there was a negative segment margin, this would be the amount of the savings.

#Garrett's Computer#####################################G#a#r#r#e#t#t#'#s# #C#o#m#p#u#t#e#r############TpM########################M#######T####{### ##s'# Exercise 10-28 (Algorithmic) Product line Lakeland Financial 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. Lakeland Financial Services Income Statement by Service Line For the Year Ended July 31, 2013 (in thousands) _____________________________________________________________________________________ ______________________________ Payroll_______GL_________Tax______Total_______________ Sales $ 4,394 $ 3,195 $3,596 $11,185 Cost of sales (2,818)_____(1,991)_____ (2,154)____ (6,963)_ Gross margin $1,576______$1,204_____ $ 1,442____ $4,222_ Avoidable fixed and variable costs $1,268 $1,474 $1,046 $3,788 Allocated fixed costs 180 141 202 523___ Total fixed cost $1,448 $1,615 $1,248 $4,311_ Operating profit $ 128 $ (411) $ 194 $ (89)__ a. Should corporate management drop the GL area? Yes Gross margin GL services $_____________ Avoidable fixed and operating costs $_____________ Segment margin $_____________ b. If the GL area were dropped, how would the company's pre-tax profit be affected? The pretax profit of the company would Increase by $______________ Check My Work Feedback a. Compute the segment margin to see if this segment should be dropped. Remember to include only relevant costs that are avoidable if dropped. Those that will remain irrespective of dropping the segment will not be considered in the decision. b. If there was a negative segment margin, this would be the amount of the savings. \fSales Cost of Sales Gross Margin Avoidable fixed and variable cost Allocated fixed costs Total fixed costs Operating Profit a b Yes Gross Margin GL services Avoidable fixed and operating costs Segment margin Payroll GL $4,394 -2,818 $1,576 $1,268 180 $1,448 $128 Tax Total $3,195 $3,596 $11,185 -1,991 -2,154 -6,963 $1,204 $1,442 $4,222 $1,474 $1,046 $3,788 141 202 523 $1,615 $1,248 $4,311 ($411) $194 ($89) $1,204 ($1,474) ($270) Use this one $1,204,000 ($1,474,000) ($270,000) $270 $270,000 The pretax profit would: Increase by: Sales Cost of Sales Gross Margin Avoidable fixed and variable cost Allocated fixed costs Total fixed costs Operating Profit a b Yes Gross Margin GL services Avoidable fixed and operating costs Segment margin Payroll GL $4,394 -2,818 $1,576 $1,268 180 $1,448 $128 Tax Total $3,195 $3,596 $11,185 -1,991 -2,154 -6,963 $1,204 $1,442 $4,222 $1,474 $1,046 $3,788 141 202 523 $1,615 $1,248 $4,311 ($411) $194 ($89) $1,204 ($1,474) ($270) Use this one $1,204,000 ($1,474,000) ($270,000) $270 $270,000 The pretax profit would: Increase by: