Campus Package Delivery (CPD) provides transportation services in and around Paradise. Its profits have been declining, and management is planning to add a package express service that is expected to increase revenue by $305,000 per year. The total cost to lease the necessary package delivery vehicles from the local dealer is $25,000 per year. The present manager will continue to supervise all services at no increase in salary. Due to expansion, however, the labor costs and utilities would increase by 50 percent. Rent and other costs will increase by 20 percent.


Annual Income Statement before Expansion
  Sales revenue $ 762,000

       Vehicle leases 302,000
       Labor 239,000
       Utilities 30,000
       Rent 65,000
       Other costs 35,000
       Manager’s salary 117,000

  Total costs $ 788,000

  Operating profit (loss) $ (26,000 )


a. Prepare a report of the differential costs and revenues if the express service is added.


b. Should management start the express service?


Tom’s Tax Services is a small accounting firm that offers tax services to small businesses and individuals. A local store owner has approached Tom about doing his taxes but is concerned about the fees Tom normally charges. The costs and revenues at Tom’s Tax Services are presented below:


Annual Income Statement
  Sales revenue $ 740,000

     Labor 471,000
     Equipment lease 49,200
     Rent 41,700
     Supplies 32,000
     Tom’s salary 74,000
     Other costs 22,500

  Total costs $ 690,400

  Operating profit (loss) $ 49,600


If Tom gets the store’s business, he will incur an additional $59,500 in labor costs. Tom also estimates that he will have to increase equipment leases by about 5 percent, supplies by 10 percent, and other costs by 5 percent.


a. What are the differential costs that would be incurred as a result of adding this new client?



b. Tom would normally charge about $75,000 in fees for the services the store would require. How much can he reduce his standard fee and still not lose money on this client?




Betty’s Fashions operates retail stores in both downtown and suburban locations. The company has two responsibility centers: the City Division, which contains stores in downtown locations, and the Mall Division, which contains stores in suburban locations. Betty’s CEO is concerned about the profitability of the City Division, which has been operating at a loss for the last several years. The most recent City Division income statement follows. The CEO has asked for your advice on shutting down the City Division’s operations. If the City Division is eliminated, corporate administration is not expected to change, nor are any other changes expected in the operations or costs of the Mall Division.


Divisional Income Statement
For the Year Ending January 31
  Sales revenue $ 5,000,000
    Advertising—City Division 182,000
    Cost of goods sold 2,850,000
    Divisional administrative salaries 297,000
    Selling costs (sales commissions) 587,000
    Rent 742,000
    Share of corporate administration 482,000

  Total costs $ 5,140,000

  Net loss before income tax benefit $ -140,000
  Tax benefit at 40% rate 56,000

  Net loss $ -84,000


What revenues and costs are probably differential for the decision to discontinue City division’s operations?


What will be the effect on Betty’s profi ts if the division is eliminated?



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