Question

ServicePro provides two kinds of services. During the most recent accounting period, the two service lines produced the following operating results:

	Service 1				Service 2
Service revenue	$	135,000			$	55,000
Unit-level materials	$	(31,000	)		$	(13,000	)
Unit-level labor	$	(41,000	)		$	(25,000	)
Product-level selling & administrative costs	$	(21,000	)		$	(14,500	)
Company wide facility-level costs	$	(6,000	)		$	(6,000	)
Net income (loss)	$	36,000			$	(3,500	)

If the company stops providing Service 2:

Answer 1

If S-2 is stopped, there would be a decrease in net income.

Here avoidable costs are direct material, direct labor, and selling & administrative. Only the facility-level cost is unavoidable; therefore, it should not be considered.

Net income of S-2 = Revenue – All avoidable costs

                                    = 55,000 – (13,000 + 25,000 + 14,500)

                                    = 55000 – 52,500

                                    = 2,500

This income should be lost, if S-2 is discontinued.