Managerial Accounting

Dropping a product line. Hayley and Associates is a public accounting firm that offers three types of servicesaudit, 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 the variable costs associated with consulting would be saved, and 40 percent of the fixed costs associated with consulting would be save. 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 cost associated with auditing would not be affected.

Segmented income statement for these producr line appear as follows

Product

Consulting Tax Auditing

Revenue $300,000 $400,000 $500,000

Variable Costs 250,000 300,000 350,000

Contribution Margin $50,000 100,000 150,000

Fixed Costs 50,000 60,000 80,000

Operating Profit 0 40,000 70,000

Prepare a report to 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.