(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 wold be lost, all the vaiable 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 50 percent the variable costs associated with tax would increase by 50 percent and the fixed costs associated with tax would increase by 20 percent. revenues and costs associated with auding would not be affected.

Segmented income statements for these product lines appear as follows

	consulting	tax	auditing
revenues	$300,000	$400,000	$500,000
variable cost	250,000	300,00	350,000
contribution margin	$50,000	$100,000	$150,000
fixed costs	0	60,000	80,000

operating profit 0 $40,000 $70,000

Prepare a report to the management of Hayley and Associates advising whether to drop consulting and increase tax. Assume tax woudl nto be increased if consulting were kept. Include a differential analysis.