Question

Question 2

You are currently trying to decide between two cost structures for your business: one that has a greater proportion of short-term fixed costs and another that is more heavily weighted to variable costs. Estimated revenue and cost data for each alternative are as follows:

	Cost Structure
	Alternative 1				Alternative 2
Selling price per unit	$	50			$	50
Variable cost per unit		35				30
Short-term fixed costs per year		40,000				45,000

Required:

1. What sales volume, in units, is needed for the total costs in each cost-structure alternative to be the same?

2. Suppose your profit goal for the coming year is 10% of sales (i.e., operating profit/sales = 10%). What sales level in units is needed under each alternative to achieve this goal?

3. Suppose again that your profit goal for the coming year is 10% of sales. What sales volume in dollars is needed under each alternative to achieve this goal?

Refer to the AccuTax Inc. exhibit One of the partners is planning to retire at the end of the year. May Higgins, the sole remaining partner, plans to add a manager at an annual salary of $90,240. She expects the manager to work, on average, 45 hours a week for 45 weeks per year. She plans to change the required staff time for each hour spent to complete a tax return to the following:

	Business Return			Complex Individual Return			Simple Individual Return
Partner		0.4	hour		0.07	hour		—
Manager		0.1	hour		0.13	hour		—
Senior consultant		0.5	hour		0.40	hour		0.2	hour
Consultant		—			0.40	hour		0.8	hour

The manager is salaried and earns no overtime pay. Senior consultants are salaried but receive time and a half for any overtime worked. The firm plans to keep all the senior consultants and adjust the number of consultants as needed including employing part-time consultants, who also are paid on an hourly basis. Higgins has also decided to have five supporting staff at $44,000 each. All other operating data remain unchanged. The manager will share 9% of any profit over $520,000 before bonus.

Required:

1. What is the budgeted total cost for overtime hours worked by senior consultants?

2. How many full-time consultants should be budgeted?

3. Determine the manager’s total compensation and total pretax operating income for the firm, assuming that the revenues from preparing tax returns remain unchanged.

Answer 1

Answer

1) Calculation of indifference point in units

Indifference point in units = change in fixed cost /change in contribution per unit

Alternative 1

Fixed cost =40000

Contribution = selling price per unit- variable price unit

= $ 50- $ 35

= $ 15

Alternative 2

Fixed cost = 45,000

Contribution = selling price per unit- variable cost per unit

= $ 50-$ 30

= $ 20

Indifference point in units = 45000-40000/20-15

= 5000/5

= 1000 units

2) Alternative 1

Profit goal is = 10% of sales

Fixed cost = 40000

Contribution = $ 15

Required sales is assumed as X = fixed cost+ profit/contribution per unit

X = 40000+0.1(50) X/15

15X=40000+5X

10X= 40000

X= 4000 units

Alternative 2

Profit goal is = 10% of sales

Fixed cost = 45000

Contribution = $ 20

Required sales is assumed as X = fixed cost + profit/contribution per unit

X = 45000+0.1(50) X/20

20X=45000+5X

15X= 45000

X= 3000 units

3) Alternative A

Based on above part 2

Sales in dollars is = 4000 units *50 per unit

= $ 200,000

Alternative 2

Based on above part 2

Sales in dollars is = 3000 units *50 per unit

= $ 150,000