Dropping a product line. Hayley and Associates 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 business 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 40 percent of the fixed costs associated with consulting would be saved. If consulting is dropped, tax revenues are expected to increase by 5 0 percent, the variable costs associated with tax would increase by 50 percent and the fixed costs associated with tax would increase 20 percent. Revenues and costs associated with auditing would not be affected.

Segmented income statements for these product lines appear as follows:

Prepare a report to the management of Hayley and Associates advising whether to drop consulting and increase tax. Assume tax would not be increased if consulting were kept. Include a differential analysis like that in the bottom part of Exhibit 8.5.

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Revenue Variable Costs Contribution Margin Fixed Costs Operating Profit Product Consulting Tax Auditing $300,000 $400,000 $500.000 250,000 300,000 350,000 $ 50,000 $100,000 $150.000 50.000 60.000 80,000 $ 0 $ 40,000 $ 70.000