Laundry 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 below) 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
Less: Variable costs			1,000,000	200,000	1,200,000
Contribution margin			2,000,000	800,000	2,800,000
Less: Traceable fixed costs			1,000,000	500,000	1,500,000
Less: Common fixed costs			500,000	500,000	1,000,000
Profit			500,000	(200,000)	300,000
Traceable fixed costs are incurred directly by the identified line of business. Common fixed costs
are common to both lines of business and have been arbitrarily allocated equally to each line, e.g.,
sales force, reception, and delivery trucks.
REQUIRED:
a. Assume that common fixed costs would decrease by $200,000 if the dry cleaning business
were closed. By how much will Laundry Fresh's 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 Laundry Fresh's profit increase or decrease if it closes the dry cleaning operations?