auditing tax consulting total revenues $1,625,000 $450,000 $700,000 $2,775,000 variable cost $420,000 $276,000 $470,000 $1,166,000 contribution...

	auditing	tax	consulting	total
revenues	$1,625,000	$450,000	$700,000	$2,775,000
variable cost	$420,000	$276,000	$470,000	$1,166,000
contribution margin	$1,205,000	$174,000	$230,000	$1,609,000
direct fixed cost	$100,000	$175,000	$190,000	$465,000
segmetn margin	$1,105,000	-$1,000	$40,000	$1,144,000
allocated fixed costs	$375,000	$115,000	$175,000	$665,000
net income	$730,000	-$116,000	-$135,000	$479,000

invested assets	$2,000,000	$230,000	$100,000	$2,330,000

The amounts shown as 'direct fixed costs' represent salaries of professional personnel directly traceable to the respective divisions. The 'allocated fixed costs' represent central administrative charges for the firm overall and are not directly traceable to specific divisions of the firm.

BCS has a thriving audit practice for which there is increasing demand. Since both the Tax and Consulting divisions of the practice are losing money, the firm is considering whether they should close one or both of those divisions to make room for extra audit clients. Bhat feels that the consulting group should be eliminated since it is showing a loss of $135,000 while the tax division is only showing a loss of $116,000. Cunha argues that the tax division should be eliminated, while Sutera thinks they should both be shut since they are both losing money.

76.Based on the information shown above, which partner is correct and WHY?

The firm has decided that, in order to make room for audit clients, they MUST discontinue one of the divisions. Consider the following additional information regarding this decision:

If the tax division is dropped, many of those professionals could be used elsewhere in the firm and could be reassigned to either the audit or consulting divisions and, accordingly, $125,000 (of the $175,000) of direct fixed salaries will be transferred to the other divisions. The remainder of the personnel would, unfortunately, have to be let go.

Also, if the tax division is dropped, audit revenues are estimated to increase by $340,000. Consulting revenues would be unaffected.

What would be the incremental income (or loss) if the tax division was discontinued?

The consulting staff is not as versatile or useful in audit and tax areas, thus, if the consulting division were discontinued, most would have to be let go and could not be used in the audit or tax areas. In this case, $175,000 (of the $190,000) salaries would be dropped with the remainder being reassigned elsewhere in the firm.

In addition, if the consulting division is discontinued, revenues of the audit division will increase by only $250,000 and tax-division revenues would be unaffected.

What would be the incremental income (or loss) if the consulting division was discontinued?

Based on the above, do you recommend closing the tax division or the consulting division AND by how much (what is the incremental benefit of making the correct decision)?

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Expert Solution

ekkarill92 answered 1 year ago

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