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 $ 736,000 Costs Labor 466,000 Equipment lease 49,300 Rent 42,400 Supplies 32,300 Tom’s salary 73,500 Other costs 22,000 Total costs $ 685,500 Operating profit (loss) $ 50,500 If Tom gets the store’s business, he will incur an additional $58,800 in labor costs. Tom also estimates that he will have to increase equipment leases by about 10 percent, supplies by 10 percent, and other costs by 10 percent. Required: What are the differential costs that would be incurred as a result of adding this new client? Tom would normally charge about $73,900 in fees for the services the store would require. How much could he offer to charge and still not lose money on this client? What considerations, other than costs, are necessary before making this decision?

Answer 1

Answer:

It would need to charge at least 66,960 to break even.

But it should offer his normal fee

Explanation:

Sales revenue 736,000

Cost Labor      (466,000)

Lease                 (49,300)

Rent                   (42,400)

Supplies            (32,300)

Tom salary        (73,500)  

Operating profit 50,500

increase in labor cost 58,800

increase in lease           4,930

supplies increase          3,230

the rent is a fixed cost, it would not change.

Total incremental cost: 66,960‬

It would need to charge at least 66,960 to break even.

Anyway, Tom should offer their normal fee as this job takes responsabilities and use Tom capacity to attend other client as it would invest time on this store rather than other projects