Question

answers in red are wrong.

Exercise 4.39 John and Steve CAS is a well-established accounting firm with two partners and four staff in a small, rural town. The firm performs financial statement reviews and compilations and prepares tax returns for local companies and individuals. One partner is concerned that several long-time individual clients may not be profitable and should be dropped. One of these customers is Mabel Farley. Her documentation is highly disorganized, and she brings it into the firm five days before the filing deadline. Her tax return requires about 6 hours of staff time and 1 hour of partner time. She has been paying a flat fee of $274 each year. A more recent customer is John Crowe. His documentation is well organized, and he brings it into the firm three months before the filing deadline. His financial dealings require a fairly complex tax return. His return requires 1 hour of staff time and 2 hours of partner time. John pays based on time at a rate of $139 per hour. The firm is operating at capacity during tax season, partners and staff work 14- to 18-hour days in March and April to complete all the returns before the April 30 deadline. Staff members are paid $21 per hour, and partners are paid $96 per hour. Fixed overhead costs such as rent are allocated to each job at a rate of $51 per partner labour hour. Your answer is partially correct. Try again. which customer is more profitable? John Crow Mabel Farley Profit 102 John Crow V is more profitable. LINK TO TEXT x Your answer is incorrect. Try again. At what flat fee for Mabel's return would the firm be indifferent between the two clients, assuming no time constraints for completing the returns? Assuming staff and partner costs are 375 Assuming staff and partner costs are variable 53.57 LINK TO TEXT

Answer 1

1. John Crow is more profitable.

John Particulars Crow Revenue (3 Hrs x $139) $ 417 Mabel Farley $ 274 Less Cost: Partner Staff (2 Hrs x $96) (1 Hr x $21) $ $ 192 (1 Hr x $96) $ 96 21 (6 Hrs x $21) $ 126 Profit $ 204 $ 52

2. Flat fee for Mabel Farley's Return would be:

a. Assuming staff and partner costs are fixed, firm will be indifferent if equal amount of fees charged from each client. Thus, the firm would be indifferent if Mabel Farley was charged $ 417.

b. Assuming staff and partner costs are variable, firm will be indifferent if equal amount of Contribution margin is earned from both the clients. Firm will be indifferent if the profit for Mabel was $ 204 instead of $ 52 which means $ 152 higher than current profit. In order to earn $152 higher profit, fees charged has to be $426 ($274 + $152).