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Keep or Drop a Product Line: Cainas Company CPAs is a regional accounting firm that...

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Accounting

  1. 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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