Viena is a regional firm that offers audit, tax, and consulting services. The pa
ID: 2497634 • Letter: V
Question
Viena is a regional firm that offers audit, tax, and consulting services. The partners are concerned about the profitability of their audit business, and a closure decision might be forthcoming. If the firm drops the audit activities, it might do more tax work. Only 30 percent of facility costs associated with auditing disappears by dropping the auditing function. More tax work can increase tax revenues by 40 percent, but tax service-level costs also increase by 40 percent. Total facility cost is unchanged whether or not tax work is increased. Segmented income statements for these three product lines follow.
Determine which alternative Viena should choose: (1) keep the auditing (2) drop the auditing line without increasing tax work or (3) drop auditing and increase tax work.
Auditing Tax Consulting Sales 300,000 500,000 600,000 Service-level cost 250,000 300,000 350,000 Shared Facility Cost 50,000 60,000 80,000 Operating income 0 140,000 170,000Explanation / Answer
Viena a Regional Firm Auditing Taxation Consulting Keep the Auditing Drop the auditing line without increasing tax work Drop auditing and increasing tax work Sales 300000 500000 600000 1400000 1100000 1300000 Service Level Cost 250000 300000 350000 900000 900000 1020000 Shared facility cost 50000 60000 80000 190000 175000 190000 Operating Income 0 140000 170000 310000 25000 90000 Viena should choose the 1 option keep the Auditing.
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