Question

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?

Answer 1

• 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