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	$	280		$	1,150		$	1,900
Variable cost per tax return (including wage paid to tax preparer)	$	215		$	1,050		$	1,740
Expected tax returns prepared per year		33,000			11,000			11,000

The total fixed costs per year for the company are $882,700.

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

Answer a.

Answer b.

Individuals:

Contribution Margin per tax return = Price charged per tax return - Variable cost per tax return
Contribution Margin per tax return = $280 - $215
Contribution Margin per tax return = $65

Partnerships:

Contribution Margin per tax return = Price charged per tax return - Variable cost per tax return
Contribution Margin per tax return = $1,150 - $1,050
Contribution Margin per tax return = $100

Corporation:

Contribution Margin per tax return = Price charged per tax return - Variable cost per tax return
Contribution Margin per tax return = $1,900 - $1,740
Contribution Margin per tax return = $160

Sales Mix = 33,000 : 11,000 : 11,000
Sales Mix = 3 : 1 : 1

Average Contribution Margin per tax return = (3/5) * $65 + (1/5) * $100 + (1/5) * $160
Average Contribution Margin per tax return = $91

Overall Breakeven Point = Fixed Costs / Average Contribution Margin per tax return
Overall Breakeven Point = $882,700 / $91
Overall Breakeven Point = 9,700 tax returns

Answer c.

Sales Mix = 6 : 1 : 3

Average Contribution Margin per tax return = (6/10) * $65 + (1/10) * $100 + (3/10) * $160
Average Contribution Margin per tax return = $97

Overall Breakeven Point = Fixed Costs / Average Contribution Margin per tax return
Overall Breakeven Point = $882,700 / $97
Overall Breakeven Point = 9,100 tax returns