Dropping a product line
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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 will be lost, all the variable costs associated with consulting would be saved, and 40% of the fixed costs associated with consulting would be saved. If consulting is dropped, tax revenues are expected to increase by 50%, and fixed costs associated with tax would increase by 20%. Revenues and costs associated with auditing 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 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 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.
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Solution Summary
Solution analyzes the given data to determine if one of the product lines can be dropped.
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Please refer attacged file for better clarity of table.
Case :
Consulting Business is dropped
Fixed Costs with Consulting =50000*(1-40%)=30,000
New Tax Revenue=150% of earlier Tax Revenue=150%*400000=600,000
New Tax Variable Costs=150% of earlier Variable Costs=150%*300000=450,000
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- BEng (Hons) , Birla Institute of Technology and Science, India
- MSc (Hons) , Birla Institute of Technology and Science, India
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