Question

In: Accounting

Sell Block prepares three types of simple tax returns: individual, partnerships, and (small) corporations. The tax...

Sell Block prepares three types of simple tax returns: individual, partnerships, and (small) corporations. The tax returns have the following characteristics: Individuals Partnerships Corporations Price charged per tax return $ 160 $ 850 $ 1,750 Variable cost per tax return (including wage paid to tax preparer) $ 105 $ 750 $ 1,590 Expected tax returns prepared per year 56,000 7,000 7,000 The total fixed costs per year for the company are $910,000. Required: a. What is the anticipated level of profits for the expected sales volumes? b. Assuming that the product mix is the same at the break-even point, compute the break-even point. c. Suppose the product sales mix changes so that, for every ten tax returns prepared, six are for individuals, one is for a partnership, and three are for corporations. Now what is the break-even volume for Sell Block?

Solutions

Expert Solution

  • All working forms part of the answer
  • Requirement 1: Anticipated Income at given level

Working

Individual

Partnership

Corporations

Total

A

Price charged per return

$                                 160.00

$                              850.00

$                                 1,750.00

B

Variable cost per return

$                                 105.00

$                              750.00

$                                 1,590.00

C=A-B

Contribution margin per return

$                                   55.00

$                              100.00

$                                     160.00

D

Expected no. of returns

56000

7000

7000

70000

E=C x D

Total contribution margin

$                     30,80,000.00

$                    7,00,000.00

$                         11,20,000.00

$                      49,00,000.00

F

Total Fixed Cost

$                        9,10,000.00

G=E - F

Anticipated Net Income (level of profits)

$                      39,90,000.00

  • Requirement 2: Break Even at current Sales Mix

Working for sales mix

Working

Individual

Partnership

Corporations

A

Price charged per return

$                                 160.00

$                              850.00

$                                 1,750.00

B

Variable cost per return

$                                 105.00

$                              750.00

$                                 1,590.00

C=A-B

Contribution margin per return

$                                   55.00

$                              100.00

$                                     160.00

D

Expected no. of returns

56000

7000

7000

E=D/70000 returns

Sales Mix percentage

80%

10%

10%

F = C x E

Weighted average contribution margin

$                                   44.00

$                                10.00

$                                       16.00

Weighted average contribution margin per return

Individual

$                                44.00

Partnership

$                                10.00

Corporations

$                                16.00

Total weighted average contribution margin per return

$                                70.00

Answer:

A

Fixed Cost

$                    9,10,000.00

B

Total weighted average contribution margin per return

$                                70.00

C=A/B

No. of returns to Break Even

13000

D= C x 80%

Individual

10400

E= C x 10%

Partnership

1300

F = C x 10%

Corporations

1300

Total

13000

  • Requirement 3: New Break Even when sales mix is changed

Working

Individual

Partnership

Corporations

A

Price charged per return

$                                 160.00

$                              850.00

$                                 1,750.00

B

Variable cost per return

$                                 105.00

$                              750.00

$                                 1,590.00

C=A-B

Contribution margin per return

$                                   55.00

$                              100.00

$                                     160.00

D

Sales Mix percentage

60% [6/10]

10% [1/10]

30% [3/10]

E= C x D

Weighted average contribution margin

$                                   33.00

$                                10.00

$                                       48.00

Weighted average contribution margin per return

Individual

$                                   33.00

Partnership

$                                   10.00

Corporations

$                                   48.00

Total weighted average contribution margin per return

$                                   91.00

Answer:

A

Fixed Cost

$                       9,10,000.00

B

Total weighted average contribution margin per return

$                                   91.00

C=A/B

No. of returns to Break Even

10,000

D= C x 60%

Individual

6000

E= C x 10%

Partnership

1000

F = C x 30%

Corporations

3000

Total

10,000


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