Question

Sell Block prepares three types of simple tax returns: Individual, partnerships, and (small) corporations. The tax returns have the following characteristics: Individuals $ 190 Partnerships $ 1,000 Corporations $ 1,900 Price charged per tax return Variable cost per tax return (including wage paid to tax preparer) Expected tax retums prepared per year $ $ 120 33,000 900 11,000 $ 1,710 11,000 The total fixed costs per year for the company are $1,090,000. Required: a. What is the anticipated level of profits for the expected sales volumes? Anticipated profit b. Assuming that the product mix is the same at the break-even point, compute the break-even point. СС Break even point retums 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? Break-even point returns References eBook & Resources SAM 22 tv W х MacBook Pro esc 20 QOD ODO F2 F3 F4

Answer 1

a) Anticipated profits:

Particulars	Individuals	Partnerships	Corporations	Total
Expected tax returns prepared per year (A)	33,000	11,000	11,000
Price charged per tax return (B)	$               190	$            1,000	$              1,900
Total revenue (C = A*B)	$   6,270,000	$ 11,000,000	$    20,900,000	$    38,170,000
Variable cost per tax return (D)	$               120	$                900	$              1,710
Total variable cost (E = -D*A)	$ (3,960,000)	$ (9,900,000)	$ (18,810,000)	$ (32,670,000)
Total fixed costs per year (F)				$    (1,090,000)
Anticipated profits (G=C+E+F)				$      4,410,000

b) Break-even point for Sell Block:
Particulars	Individuals	Partnerships	Corporations	Total
Expected tax returns prepared per year	33,000	11,000	11,000	55,000
Sales contribution (Share of tax return/Total tax returns) percentage	33000/55000	11000/55000	11000/55000
60%	20%	20%
Price charged per tax return	$                       190	$                1,000	$                  1,900
Variable cost per tax return	$                       120	$                    900	$                  1,710
Contribution margin per tax return = Price charged per tax return - Variable cost per tax return	$                         70	$                    100	$                     190
Weighted contribution margin = Sales contribution percentage * contribution margin per tax return	60%*70 =	20%*100 =	20%*190 =
$                         42	$                      20	$                        38	$                  100
Break even point = Fixed cost/weighted contribution margin	1,090,000/100 =	10900 returns

Proof of the same as below:

Particulars	Individuals	Partnerships	Corporations	Total
Expected tax returns prepared per year (A)	6,540	2,180	2,180	10,900
Price charged per tax return (B)	$                       190	$                1,000	$                  1,900
Total revenue (C = A*B)	$           1,242,600	$        2,180,000	$         4,142,000	$      7,564,600
Variable cost per tax return (D)	$                       120	$                    900	$                  1,710
Total variable cost (E = -D*A)	$            (784,800)	$     (1,962,000)	$       (3,727,800)	$    (6,474,600)
Total fixed costs per year (F)				$    (1,090,000)
Anticipated profits (G=C+E+F)				$                     -

c) Change in product sales mix and revised break even point as below:
Particulars	Individuals	Partnerships	Corporations	Total
Sales contribution percentage ( For every 10 tax returns prepared, 6 are for individuals, so share is 60%, likewise for others)	6/10 =	1/10 =	3/10 =
60%	10%	30%
Price charged per tax return	$                       190	$                1,000	$                  1,900
Variable cost per tax return	$                       120	$                    900	$                  1,710
Contribution margin per tax return = Price charged per tax return - Variable cost per tax return	$                         70	$                    100	$                     190
Weighted contribution margin = Sales contribution percentage * contribution margin per tax return	60%*70 =	20%*100 =	20%*190 =
$                         42	$                      10	$                        57	$                  109
Break even point = Fixed cost/weighted contribution margin	1,090,000/109 =	10000	returns
Proof as below: Particulars Individuals Partnerships Corporations Total Expected tax returns prepared per year (A)                        6,000                    1,000                      3,000                10,000 Price charged per tax return (B) $                       190 $                1,000 $                  1,900 Total revenue (C = A*B) $           1,140,000 $        1,000,000 $         5,700,000 $      7,840,000 Variable cost per tax return (D) $                       120 $                    900 $                  1,710 Total variable cost (E = -D*A) $            (720,000) $         (900,000) $       (5,130,000) $    (6,750,000) Total fixed costs per year (F) $    (1,090,000) Anticipated profits (G=C+E+F) $                     -