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 (in thousands) Payroll GL Tax Total Sales $3,520 $2,560 $2,880 $8,960 Cost of sales (2,240) (1,600) (1,728) (5,568) Gross margin $1,280 $960 $1,152 $3,392 Avoidable fixed and variable costs $1,008 $1,176 $832 $3,016 Allocated fixed costs 144 112 168 424 Total fixed costs $1,152 $1,288 $1,000 $3,440 Operating profit $128 $(328) $152 $(48) If the GL area were dropped, how would the company’s pre-tax profit be affected? Note: Do not use a negative sign with your answer. Dropping the segment would result in an

To determine how the company's pre-tax profit would be affected by dropping the General Ledger (GL) service line, we need to consider only the avoidable costs associated with the GL area. The allocated fixed costs would likely remain and be reallocated to the remaining service lines or absorbed by the company as a whole, so they are not avoidable. From the income statement provided, we have: GL Service Line: Sales: $2,560,000 Avoidable Fixed and Variable Costs: $1,176,000 Operating Loss: $(328,000) If the GL service line is dropped, the sales associated with it would also be lost, but the company would no longer incur the avoidable costs. The impact on pre-tax profit would be the difference between the lost sales and the saved avoidable costs. Change in Pre-tax Profit = Avoidable Costs Saved - Sales Lost Change in Pre-tax Profit = $1,176,000 - $2,560,000 Change in Pre-tax Profit = -$1,384,000 However, since the GL area is showing a pre-tax loss of $328,000, by eliminating this service line, the company would actually improve its pre-tax profit by the amount of the loss that would no longer be incurred. Therefore, the improvement in pre-tax profit by dropping the GL service line would be $328,000 (since we are not using a negative sign as per the instruction). Dropping the segment would result in an

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