Chapman & Tracy is a regional firm that offers audit, tax, and consulting services. The partners are concerned about the profitability of their audit business, and a closure decision might be forthcoming. If the firm drops the audit activities, it might do more tax work. Only 30 percent of the facility costs associated with auditing disappears by dropping the auditing function. More tax work can increase tax revenues by 40 percent, but tax service-level costs also increase by 40 percent. Total facility cost is unchanged whether or not tax work is increased. Segmented income statements for these three product lines follow.

Auditing Tax Consulting SSTEIIEIS ar dennar ker con eduaan ee oust dotecmansar ters $300,000 $500,000 $600,000 SeiVice-leVeliCOSea cca 250,000 300,000 350,000 SMAKCC ACI, COST eave Seudineteaceseaes: 50,000 60,000 80,000 Operating income (loSs).............. $ 0 $140,000 $170,000 Required

a. Determine which alternative Chapman & Tracy should choose: (1) drop the auditing line without increasing tax work or (2) drop auditing and increase tax work.

b. What other considerations are important to the decision to drop auditing?