Exercise 10-21 Name:
Insert your answers in the gray-shaded cells. Enter amounts to be deducted as negatives.
If an answer is incorrect, the word “wrong” will appear.
a. Individual Estate
Corporate
Sales price 350$ 1,200$ 750$
Variable costs (50) (200) (150)
Contribution margin 300$ 1,000$ 600$
÷ Hours per return 2 8 5
CM per hour of professional time 150$ 125$ 120$
How should White allocate her time?
b. Desired hours per year 2,000
CM per hour $150
Contribution margin 300,000$
Fixed costs (80,000)
Pretax income 220,000$
c. What other factors should White consider in allocating her time?
d. What could White do to overcome the scarce resource constraint?
White should carefully consider the relationship between the three services she offers.
For example, much of the demand for individual and estate tax services may be
generated by the services she provides corporate clients. It may be because of the
quality of her corporate tax services that demand is generated to provide individual
income and estate tax services. Accordingly, there may be long-term negative
consequences to providing only individual income tax services.
Solution
According to the CM generated per hour of professional time, White would perfer to
satisfy demand for services in the following order: individual taxation, estate taxation,
and corporation taxation. Because all of White’s time could be consumed in providing
individual income tax services, all of her time should be dedicated to providing that
service.
White could overcome the time constraint in one of two generic ways. First, she could
employ accountants in her firm to do work in all service lines. Secondly, she could
engage in a joint venture or partnership with other firms to provide the full array of
services to clients.
Insert your answers in the gray–shaded cells. Enter amounts to be deducted as negatives.