Keep or Drop a Product Line: Cainas Company CPAs is a regional accounting firm that...
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Accounting
Keep or Drop a Product Line: Cainas Company CPAs is a regional accounting 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. Facts known are as follows:
If the firm drops it audit work, it might do more tax work. Only 30% of the fixed costs associated with auditing disappear by dropping the audit function.
More tax work can increase revenues by 40%, but the variable costs for tax work will also increase by 40%.
The consulting practice will remain intact with no changes planned. The following income statements for each line of business are below:
Auditing
Tax
Consulting
Sales
300,000
500,000
600,000
Variable costs
250,000
300,000
350,000
Fixed Costs
50,000
60,000
80,000
Net income
-
140,000
170,000
1. Compute net income if the firm decides to keep audit (make no adjustments).
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