Question

Sell Block prepares three types of simple tax returns: individual, partnerships, and (small) corporations. The tax returns have the following characteristics. Individuals Partnerships Corporations $ 200 $1,000 $2,000 Price charged per tax return Variable cost per tax return (including wage paid to tax preparer) Expected tax returns prepared per year $ 180 60,000 $ 900 4,000 $ 1,800 16,000 The total fixed costs per year for the company are $3,690,000 Required: a. What is the anticipated level of profits for the expected sales volumes? b. Assuming that the product mix is the same at the break-even point, compute the break-even point. c. Suppose the product sales mix changes so that for every ten tax returns prepared, six are for individuals, one is for a partnership, and three are for corporations. Now what is the break-even volume for Sell Block?

Please answer A, B and C.

Answer 1

	a	ANTICIPATED LEVEL OF PROFIT
			Individual	Partnership	Corporation	TOTAL
	A	Expected Number of Tax Returns	60,000	4,000	16,000
	B	Price charged per return	$200	$1,000	$2,000
	C=A*B	Annual Revenue	$12,000,000	$4,000,000	$32,000,000	$48,000,000
	D	Variable Cost per Return	$180	$900	$1,800
	E=A*D	Annual Variable Costs	$10,800,000	$3,600,000	$28,800,000	$43,200,000
	F=C-E	Annual Contribution Margin	$1,200,000	$400,000	$3,200,000	$4,800,000
	G	Fixed Cost				$3,690,000
	H=F-G	Anticipated Level of Profit				$1,110,000
	b		Individual	Partnership	Corporation	Total
	A	Expected Number of Tax Returns	60,000	4,000	16,000	80,000
	B=A/80000	Proportion in the total Returns	0.75	0.05	0.20	1.00
	C	Price charged per return	$200	$1,000	$2,000
	D	Variable Cost per Return	$180	$900	$1,800
	E=C-D	Unit Contribution Margin	$20	$100	$200
	F=B*E	Proportion of unit contribution	$15	$5	$40	$60
	G	Fixed Cost				$3,690,000
	H=G/F	Break Even Number of Returns				61,500
		Break Even Point:
		Individual Returns	46125	(61500*0.75)
		Partnership Returns	3075	(61500*0.05)
		Corporation Returns	12300	(61500*0.20)
	c	Changed Product Mix
			Individual	Partnership	Corporation	Total
	B	Proportion in the total Returns	0.6	0.1	0.3	1
	C	Price charged per return	$200	$1,000	$2,000
	D	Variable Cost per Return	$180	$900	$1,800
	E=C-D	Unit Contribution Margin	$20	$100	$200
	F=B*E	Proportion of unit contribution	$12	$10	$60	$82
	G	Fixed Cost				$3,690,000
	H=G/F	Break Even Number of Returns				45,000
		Break Even Point:
		Individual Returns	27,000	(45000*0.6)
		Partnership Returns	4,500	(45000*0.1)
		Corporation Returns	13,500	(45000*0.3)