Question

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: TOM'S TAX SERVICES Annual Income Statement Sales revenue Costs Labor Equipment lease Rent Supplies Tom's salary Other costs 464.000 48.400 42,000 30.700 73.400 22.200 Total costs Operating profit (loss) If Tom gets the store's business, he will incur an additional S60,000 in labor costs. Tom also estimates that he will have to increase equipment leases by about 10 percent, supplies by 5 percent, and other costs by 10 percent. Required: a. What are the differential costs that would be incurred as a result of adding this new client? Total costs b. Tom would normally charge about S73,200 in fees for the services the store would require. How much could he offer to charge and still not lose money on this client? educe the fee c. What considerations, other than costs, are necessary before making this decision? (You may select more than one answer. Single click the box with the question mark to produce a check mark for a correct answers and double click the box with the question mark to empty the box for a wrong answers.) Whether this will lead to demands by other clients for lower fees. 2 What other opportunities the company has for its tax professionals. Whether the business is likely to expand in the future Profitability of the other contracts Current financial position of the company

Answer 1

Answer

• All working forms part of the answer
• Requirement ‘a’

	Additional Volume
Labor	$               60,000
Equipment lease	$                 4,840
Supplies	$                 1,535
Other Costs	$                 2,220
Total Expenses	$               68,595

• Requirement ‘b’

Answer = Reduce the fees by $ 4,605

This is because normal fees amounts to $ 73,200
However, additional expenses would be $ 68,595. Any amount of fees over $ 68595 will lead to Net Income increase.
Hence, he can reduce the fees down to $ 68595 and still not loose money.
He can reduce the fees by $ 4605 [73200 – 68595]

• Requirement ‘c’

All the options are correct, except the last one “Current Financial position of the company”