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 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 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 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 differentialanalysis.

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Product Auditing $500,000 350,000 Margin50,000 $100,000 150,000 80,000 Consulting Tax Revenue Variable Costs $300,000 250,000 $400,000 300,000 ... Fixed Costs Operating Profit. 0,000 60,000 540,000 70000