ServicePro provides two kinds of services.During the most recent accounting period,the two service lines produced the following operating results: $$\begin{array} { l l l l }
& \text { Service } 1 &{ \text { Service } 2 } \
\text { Service revenue } & \$ 80,000 & \$ 20,000 \
\text { Unit-level materials } & \$ ( 20,000 ) & \$ ( 2,000 ) \
\text { Unit-level labor }& \$ ( 30,000 ) & \$ ( 14,000 ) \
\text { Product-level selling \& adrninistrative costs } & \$ ( 10,000 ) & \$ ( 2,500 ) \
\text { Comparywide facility-level costs } & \underline{\$ ( 5,000 )} &\underline{ \$ ( 5,000 )} \
\text { Net income }&\underline{ \$ 15,000 }& \underline{\$ ( 3,500 )}
\end{array}$$ If the company stops providing Service 2:
A) The company's income will decrease by $1,500 per year.
B) The company's income will increase by $1,500 per year.
C) The company's income will decrease by $3,500 per year.
D) The company's income will increase by $3,500 per year.

Question

ServicePro provides two kinds of services.During the most recent accounting period,the two service lines produced the following operating results: $$\begin{array} { l l l l } 
& \text { Service } 1 &{ \text { Service } 2 } \
\text { Service revenue } & \$ 80,000 &  \$ 20,000 \
 \text { Unit-level materials } & \$ ( 20,000 ) & \$ ( 2,000 ) \
\text { Unit-level labor }& \$ ( 30,000 ) & \$ ( 14,000 ) \
\text { Product-level selling \& adrninistrative costs } & \$ ( 10,000 ) & \$ ( 2,500 ) \
\text { Comparywide facility-level costs }  & \underline{\$ ( 5,000 )} &\underline{ \$ ( 5,000 )} \
\text { Net income }&\underline{ \$ 15,000 }& \underline{\$ ( 3,500 )}
\end{array}$$ If the company stops providing Service 2:
A) The company's income will decrease by $1,500 per year.
B) The company's income will increase by $1,500 per year.
C) The company's income will decrease by $3,500 per year.
D) The company's income will increase by $3,500 per year.

Quizplus · Accepted Answer

Stopping Service 2 will remove its revenue of $20,000 and its direct costs (materials, labor, and administrative costs) totaling $18,500. However, the companywide facility-level costs of $5,000 allocated to Service 2 are unlikely to change immediately if Service 2 is discontinued, meaning these costs will still need to be covered by the company. Thus, the net effect is a decrease in overall income by the net loss of Service 2, which is $3,500, minus the $5,000 in facility-level costs that are no longer allocated to Service 2, resulting in a net decrease of $1,500 in the company's income.

ServicePro Provides Two Kinds of Services If the Company Stops Providing Service 2: A) the Company's

ServicePro Provides Two Kinds of Services If the Company Stops Providing Service 2:
A) the Company's