Question

Tom's Tax Services is a small accounting firm that offers tax services to small businesses and individuals. A local store ow approached Tom about doing his taxes but is concerned about the fees Tom normally charges. The costs and revenues Services follow: TOM'S TAX SERVICES Annual Income Statement Sales revenue 727,000 Costs Labor 471,000 Equipment lease 49,109 42,200 Supplies 31,000 Tom's salary 74,900 Other costs 21,500 Total costs $ 689,700 Operating profit (loss) $ 37, 300 Rent If Tom gets the store's business, he will incur an additional $58,300 in labor costs. Tom also estimates that he will have to in 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 $74,100 in fees for the services the store would require. How much could he offer to cl still not lose inoney on this client? c. What considerations, other than costs, are necessary before making this decision?

Answer 1

a.) Differential Cost by taking up new client : -

Labor Costs $58300

Equipment $2455

Supplies $1550

Other Costs $1075

Total Differential Costs $63380

b.) Normal Fees to be charged by Tom $74100

Fees can be reduced by Tom and still not lose client would be : -

Revenue - Differential Costs

$(74100-63380) = $10720

Normal Fees of $74100 can be reduced by $10720 or only differencial costs of $63380 would be charged to not lose the client.

c.) Considerations needs to be ascertained by tom other than costs would be:-

i) Number of hours avallable to Tom

ii) Operating Profit rate is only a littlle more than 5% i.e. 5.13%. If Tom wants to grow the firm then he need to accept the client proposal.