Squeaky Clean, a commercial laundry service, has two clients. Super 6 Motel and Seaside Inn. The...
Question:
Squeaky Clean, a commercial laundry service, has two clients. Super 6 Motel and Seaside Inn. The following is information about Squeaky's revenues and costs (in thousands) by customer for the previous year:
| Super 6 Motel | Seaside Inn | Total | |
|---|---|---|---|
| Revenues (fees charged) | $230 | $350 | $580 |
| Operating costs | |||
| Cost of Services (variable) | $212 | $305 | $517 |
| Salaries, Rent, and General Administration (fixed) | 20 | 35 | 55 |
| Total Operating Costs | $232 | $340 | $572 |
| Operating Profits | $ (2) | $ 10 | $ 8 |
The analysis apparently shows that Super 6 Motel is not profitable for Squeaky.
Use differential analysis to decide whether Squeaky should discontinue the Super 6 Motel account.
Eliminating a Product or Segment:
When deciding on whether or not to eliminate a product or a service line, the relevant cost to consider is the loss in contribution margin less all avoidable costs. Unavoidable fixed costs should be ignored.
Answer and Explanation: 1
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Squeaky Clean
Differential analysis
| Total with Super 6 Motel | Total without Super 6 Motel | Difference | |
|---|---|---|---|
| Revenues (fees charged) | $580 | $350 | $... |
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Relevant Costs in Eliminating a Product or Segment
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Chapter 9 / Lesson 12
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Products and segments are occasionally eliminated based on the relevant costs that outline all costs affected by a change in production or service. See the role of incremental analysis and fixed cost behavior in an example of eliminating a product.
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