Question

10 Tom's Tax Services is a small accounting firm that offers tax services to small businesses and individuals. A local store owner has approached Tom about doing his taxes but is concerned about the fees Tom normally charges. The costs and revenues at Tom's Tax Services follow 02:52:00 TON'S TAX SERVICES Annual Income Statement Sales revenue $724,000 Costs Labor 465,000 Equipment lease 48,900 Rent 43,000 Supplies 31,400 Ton's salary 73,300 Other costs 22.800 Total costs $ 684,400 Operating profit (los) 339.500 Tom gets the store's business, he will incur an additional $59,800 in labor costs. Tom also estimates that he will have to increase equipment leases by about 5 percent, supplies by 5 percent, and other costs by 5 percent Required: a. What are the differential costs that would be incurred as a result of adding this new client? b. Tom would normally charge about $73,800 in fees for the services the store would require. How much could he offer to charge and still not lose money on this client? c. What considerations, other than costs, are necessary before making this decision?

Answer 1

Requirment (a) Additional cost Labor cost $ 59,800 Equipmen (48900*5%) $ 2,445 Supplies (31400*5%) $ 1,570 other cost (22800*5%) $ 1,140 Total Differential cost $64,955 Requirment (b) Answer = Reduce the fees by $8,845. This is because normal fess amounts to $73,800 however additional expenses would be $64,955. Any amount of fees over $64,955 will lead to net income increase. Hence he can reduce the fees downt to $64,955 and still not loose money.He can reduce the fees by $8,845 [$73800-$64,955] Requirment (c) All options are correct except the last one "Current finanacial position of the company"