Question

Exercise 2-3 (Essay) Will Jones, LLP is a small CPA firm that focuses primarily on preparing tax returns for small businesses. The company pays a $500 annual fee plus $10 per tax return for a license to use Mega Tax software. Assume the cost per return is $11.68 for 300 returns and $11.16 for 432 returns and $10.93 for 536 returns. Why does the cost per return differ at each of the three volume levels?

Answer 1

In this problem, there are two types of costs, a fixed cost of $500 annually and a variable cost of $10 per return

As the volume increases, variable cost per unit remains the same but the fixed cost gets divided among more number of returns. Due to this, fixed cost per unit falls and variable cost per unit remains the same. So, the total cost per unit falls with increase in volume

This can be explained with the following table

Calculations	A	B	C = A x B	D	E = D / A	F = B + E
	Volume	Variable cost per unit	Total variable cost	Fixed costs	Fixed costs per unit	Total cost per unit
	300	10	3000	500	1.67	11.67
	432	10	4320	500	1.16	11.16
	536	10	5360	500	0.93	10.93