(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.
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Lakeland Financial Services |
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Income Statement by Service Line |
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For the Year Ended July 31, 2010 |
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(in thousands) |
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Payroll |
GL |
Tax |
Total |
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Sales |
$4,400 |
$3,200 |
$3,600 |
$11,200 |
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Cost of sales |
(2,800) |
(2,000) |
(2,160) |
(6,960) |
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Gross margin |
$1,600 |
$1,200 |
$1,440 |
$ 4,240 |
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Avoidable fixed and variable costs |
$1,260 |
$1,470 |
$1,040 |
$ 3,770 |
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Allocated fixed costs |
180 |
140 |
210 |
530 |
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Total fixed costs |
$1,440 |
$1,610 |
$1,250 |
$ 4,300 |
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Operating profit |
$ 160 |
$ (410) |
$ 190 |
$ (60) |
a. Should corporate management drop the GL area? Support your answer with appropriate schedules.
b. If the GL area were dropped, how would the company’s pre tax profit be affected?