30. LO.7 (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, 2010 (in thousands) Payroll GL Tax Total Sales $4,400 $3,200 $3,600 $11,200 Cost of sales (2,800) (2,000) (2,160) (6,960) Gross margin $1,600 $1,200 $1,440 $ 4,240 Avoidable fixed and variable costs $1,260 $1,470 $1,040 $ 3,770 Allocated fixed costs 180 140 210 530 Total fixed costs $1,440 $1,610 $1,250 $ 4,300 Operating profit $ 160 $ (410) $ 190 $ (60) a. Should corporate management drop the GL area? Support your answer with appro- priate schedules. b. If the GL area were dropped, how would the company’s pre-tax proﬁt be aﬀected?
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