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The total fixed costs per year for the company are $3, 690,000. 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?
Expert Answer
a.ANTICIPATED LEVEL OF PROFIT:
| Individual | partnership | Corporation | Total | ||
| A | Expected number of tax preparation | 60000 | 4000 | 16000 | 80000 |
| B | Variable cost per tax return | $180 | $900 | $1,800 | |
| C=A*B | Total variable cost | $10,800,000 | $3,600,000 | $28,800,000 | $43,200,000 |
| D | Total fixed cost | $3,690,000 | |||
| E=C+D | TOTAL COST | $46,890,000 | |||
| F | Price charged per tax return | $200 | $1,000 | $2,000 | |
| G=A*F | Total Revenue from preparing tax return | $12,000,000 | $4,000,000 | $32,000,000 | $48,000,000 |
| H=G-E | ANTICIPATED LEVEL OF PROFIT | $1,110,000 |
Anticipated Revenue=$48,000,000
Anticipated Costs=$46,890,000
Anticipated level of profit=$1,110,000
b.COMPUTATION OF BREAK EVEN POINT:
Ratio of product mix:60:4:16
Or , 15:1:4
With this ratio:
For 20(15+1+4) tax preparation , expected variable cost and revenue and contribution margin is given below:
| Individual | partnership | Corporation | Total | ||
| A | number of tax preparation | 15 | 1 | 4 | 20 |
| B | Variable cost per tax return | $180 | $900 | $1,800 | |
| C=A*B | Total variable cost | $2,700 | $900 | $7,200 | $10,800 |
| D | Price chared per tax return | $200 | $1,000 | $2,000 | |
| E=A*D | Total Revenue from preparing tax return | $3,000 | $1,000 | $8,000 | $12,000 |
| F=E-C | Contribution margin per 20 tax returns | $1,200 |
Contribution margin per 20 tax return of the given product mix=$1,200
Fixed cost=$3,690,000
BREAK-EVEN POINT=(3690000/1200)*20 tax returns=61,500
Individual tax return=(61500/20)*15=46125
Partnership tax return=(6150/20)=3075
Corporate tax return=(6150/20)*4=12300
The revenue at Break even point is given below:
| Type of Product | Number of tax preparation | Revenue per return | Total revenue | Variable cost per return | Total Variable cost |
| Individual | 46125 | $200 | $9,225,000 | $180 | $8,302,500 |
| partnership | 3075 | $1,000 | $3,075,000 | $900 | $2,767,500 |
| Corporation | 12300 | $2,000 | $24,600,000 | $1,800 | $22,140,000 |
| Total | 61500 | $36,900,000 | $33,210,000 | ||
| Variable cost | $33,210,000 | ||||
| Fixed cost | $3,690,000 | ||||
| Total Cost | $36,900,000 | ||||
| Profit | $0 |
c.BREAK EVEN VOLUME WITH CHANGED PRODUCT MIX:
CALCULATION OF CONTRIBUTION MARGIN IS GIVEN BELOW:
| Individual | partnership | Corporation | Total | ||
| A | number of tax preparation | 6 | 1 | 3 | 10 |
| B | Variable cost per tax return | $180 | $900 | $1,800 | |
| C=A*B | Total variable cost | $1,080 | $900 | $5,400 | $7,380 |
| D | Price chared per tax return | $200 | $1,000 | $2,000 | |
| E=A*D | Total Revenue from preparing tax return | $1,200 | $1,000 | $6,000 | $8,200 |
| F=E-C | Contribution per 10 tax returns | $820 |
Contribution margin per 10 tax return of the given product mix=$820
Fixed cost=$3,690,000
BREAK-EVEN POINT=(3690000/820)Blocks=4500 Blocks=4500*10=45,000 tax preparation
Individual tax return=(45000/10)*6=27000
Partnership tax return=(45000/10)=4500
Corporate tax return=(45000/10)*3=13500
The revenue at Break even point is given below:
| Type of Product | Number of tax preparation | Revenue per return | Total revenue | Variable cost per return | Total Variable cost | |
| Individual | 27000 | $200 | $5,400,000 | $180 | $4,860,000 | |
| partnership | 4500 | $1,000 | $4,500,000 | $900 | $4,050,000 | |
| Corporation | 13500 | $2,000 | $27,000,000 | $1,800 | $24,300,000 | |
| Total | 45000 | $36,900,000 | $33,210,000 | |||
| Variable cost | $33,210,000 | |||||
| Fixed cost | $3,690,000 | |||||
| Total Cost | $36,900,000 | |||||
| Profit | $0 |
