Question

Clinton Tax Service prepares tax returns for small businesses. The cost of preparing 800 tax returns in the prior year was:

Direct labor		$	348,800
Variable overhead			313,600
Fixed overhead			244,000
Total cost		$	906,400

At the start of the current year, the company received an offer from Advantage Business, a firm that provides bundled services to businesses. Advantage wants Clinton Tax Service to prepare tax returns for its 140 small-business clients. Clinton Tax Service has the capacity to prepare up to 1,000 returns in a given year, so this special order would not take away revenue from any of Clinton Tax Service’s current clients. Advantage is willing to pay $910 per tax return.

What will be the effect on Clinton Tax Service’s profit if it agrees to prepare returns for the 140 clients of Advantage Business? (Enter decrease in profit using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)

Profit will (increase/decrease) by $( )  per year.

Answer 1

The variable cost will change with the change in activities during the year.But the fixed cost will remain the same. As making more production the advisable that the fixed cost will remain same and variable cost will change means total cost will reduce. The but revenue will increase lead to more profit during the specific period.