Viena is a regional firm that offers audit, tax, and consulting services. The pa
ID: 2481238 • 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.
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 (loss) $0 $140,000 $170,000
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. (10 points)
Explanation / Answer
(3) Drop auditing and increase tax work , because Facility cost is unchanged/fixed which is irrespective of sales,so Viena should go for more tax work to recover the cost . Auditing function is not providing any income ,any decrease in sale may cause loss to Viena due to fixed facility cost.
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