Clean Our World (COW) is a cleaning company. Up to now, they have received significant business from both commercial and private service contracts. However, management is concerned that the segment that services private homes has been experiencing losses, and is considering discontinuing that segment of the company. Following is financial information for this past month:
Revenue from commercial: $15,000
Contribution margin percentage from commercial: 60%
Operating income/ (loss) from commercial: $6,000
Revenue from private: $800
Contribution margin percentage from private: (10%)
Operating income/ (loss) from private: ($200)
Management is concerned that some clients may cancel their commercial contracts if the private service is discontinued, because the owners of several of COW's commercial clients use the private service as well. After conducting an analysis, management estimates that 10% of COW's commercial revenue would be lost if the private service were discontinued.
By how much would Operating Income change if the private service line were dropped? Should the private service segment be dropped?

Question

Clean Our World (COW) is a cleaning company. Up to now, they have received significant business from both commercial and private service contracts. However, management is concerned that the segment that services private homes has been experiencing losses, and is considering discontinuing that segment of the company. Following is financial information for this past month: 
Revenue from commercial: $15,000
Contribution margin percentage from commercial: 60%
Operating income/ (loss) from commercial: $6,000
Revenue from private: $800
Contribution margin percentage from private: (10%)
Operating income/ (loss) from private: ($200)
Management is concerned that some clients may cancel their commercial contracts if the private service is discontinued, because the owners of several of COW's commercial clients use the private service as well. After conducting an analysis, management estimates that 10% of COW's commercial revenue would be lost if the private service were discontinued.
By how much would Operating Income change if the private service line were dropped? Should the private service segment be dropped?

Quizplus · Accepted Answer

The Answer of Clean Our World (COW) is a cleaning company. Up to now, they have received significant business from both commercial and private service contracts. However, management is concerned that the segment that services private homes has been experiencing losses, and is considering discontinuing that segment of the company. Following is financial information for this past month: 
Revenue from commercial: $15,000
Contribution margin percentage from commercial: 60%
Operating income/ (loss) from commercial: $6,000
Revenue from private: $800
Contribution margin percentage from private: (10%)
Operating income/ (loss) from private: ($200)
Management is concerned that some clients may cancel their commercial contracts if the private service is discontinued, because the owners of several of COW's commercial clients use the private service as well. After conducting an analysis, management estimates that 10% of COW's commercial revenue would be lost if the private service were discontinued.
By how much would Operating Income change if the private service line were dropped? Should the private service segment be dropped?

Clean Our World (COW) Is a Cleaning Company