Dropping Product Lines: Anderhouse & Watersen is a public accounting firm that offers three types of services: audit, tax, and consulting. The firm is concerned about the profitability of its consulting business and is considering dropping that line. If the consulting busi- ness is dropped, more tax work would be done. If consulting is dropped, all consulting revenues would be lost, all of the variable costs associated with consulting would be saved, and 60 percent of the fixed costs associated with consulting would be saved. Tax revenues are expected to increase by 40 percent, the variable costs associated with tax would increase by 40 percent, and the fixed costs associated with tax would increase by 10 percent. Revenues and costs associated with auditing would not be affected. Segmented income statements for these three product lines appear as follows:

Required: Prepare a differential cost schedule like the one in Illustration 12-8 to indicate whether Anderhouse & Watersen should drop the consulting line.

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Product Consulting Tax Auditing Revenue $300,000 $400,000 $500,000 Variable costs Contribution margin 250,000 50,000 50,000 Fixed costs Operating profit $ -0- $ 40,000 300,000 350,000 100,000 150,000 60,000 80,000 $ 70,000