Question

Sell block prepares three types of simple tax returns: individual, partnerships, and small corporations. The tax returns have the following characteristics:

Price charged per tax return: Individuals: $200 Partnerships: $1000 Corporations: $2000

Variable cost per tax return (including wage paid to tax preparer): Individuals: $180 Partnerships: $900 Corporations: $1,800

Expected tax returns prepared per year: Individuals: 60,000 Partnerships: 4,000 Corporations: 16,000

The total fixed costs per year for the company are $3,690,000

A. What is the expected profit?

B. What is the expected break-even point in total units and in total revenues?

C. Given the expected sales mix, how many total returns does Sell have to prepare to earn an after tax profit of $500,000 after tax. Assume the tax rate is 20%.

Answer 1

• All working forms part of the answer
• Requirement A

--Working

Working		Individual	Partnership	Corporations	TOTAL
A	Price charged	$                  200.00	$             1,000.00	$             2,000.00
B	Variable cost	$                  180.00	$                 900.00	$             1,800.00
C = A - B	Contribution margin per return	$                    20.00	$                 100.00	$                 200.00
D	No. of expected returns to be prepared	60,000	4,000	16,000	80,000
E = C x D	Total Contribution margin	$      1,200,000.00	$        400,000.00	$     3,200,000.00	$    4,800,000.00
F	Total Fixed Cost				$    3,690,000.00
G = E - F	Expected Profits				$    1,110,000.00

--Answer = $ 1,110,000

• Requirement B

--Working

Working		Individual	Partnership	Corporations	TOTAL
A	No. of expected returns to be prepared	60,000	4,000	16,000	80,000
B = A/80000	Sales Mix	75%	5%	20%	100%
C [calculated in req A]	Contribution margin per return	$                    20.00	$                 100.00	$                 200.00
D = B x C	Weighted Average Contribution margin per return	$                    15.00	$                     5.00	$                   40.00	$                   60.00
E	Price charged	200	1000	2000
F = (C/E) x 100	CM Ratio	10%	10%	10%
G = B x F	Weighted Average CM ratio	7.50%	0.50%	2.00%	10.00%

--Answer

A	Total Fixed Cost	$      3,690,000.00
B	Weighted Average Contribution margin per return	$                    60.00
C = A/B	Break Even point in total units	61,500 units = ANSWER
D	Weighted Average CM ratio	10.00%
E = A/D	Break Even point in Total revenues	$    36,900,000.00 = Answer

• Requirement ‘C’

A	After Tax Profits expected	$          500,000.00
B = A/(100% - 20%) = A/80%	Before Tax profits will be	$          625,000.00
C	Total Fixed Cost	$      3,690,000.00
D = B+C	Total Contribution margin required to earn desired profits	$      4,315,000.00
E	Weighted Average Contribution margin per return	$                    60.00
F = D/E	No. of total returns to be prepared to earn desired profit	71,917 returns = ANSWER