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Contribution format income statement; decision making

(LO3) Harris Horticulture provides and maintains live plants in office buildings. The company's 850 customers are charged $40 per month for this service, which includes weekly watering visits. The variable cost to service a customer's location is $20 per month. The company incurs $2,000 each month to maintain its fleet of four service vans and $3,000 each month in salaries. Harris pays a bookkeeping service $3 per customer each month to handle all invoicing and accounting functions.

Required

a.

Prepare Harris's contribution format income statement for the month.

b.

What is the expected monthly operating income if 150 customers are added?

c.

Mr. Harris is exploring options to reduce theannualbookkeeping costs.

• Option 1:Renegotiate the current contract with the bookkeeping service to pay a flat fee of $20,400 per year plus $1 per customer per month.
• Option 2:Hire a part-time bookkeeper for $27,000 per year to handle the invoicing and simple accounting. He would need to pay $5,000 per year to have taxes and year-end financial statements prepared.

Compare the current bookkeeping cost with the two options at customer levels of 850, 1,000, and 1,100.

d.

Besides the bookkeeping costs incurred, what should Mr. Harris consider before he makes a change in bookkeeping services?

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