Chapter 1, Problem 45P

Cost Data for Managerial Purposes

Tom’s Tax Services is a small accounting firm that offers tax services to small businesses and individuals. A local store owner has approached Tom about doing his taxes but is concerned about the fees Tom normally charges. The costs and revenues at Tom’s Tax Services follow.

If Tom gets the store’s business, he will incur an additional $60,000 in labor costs. Tom also estimates that he will have to increase equipment leases by about 10 percent, supplies by 5 percent, and other costs by 15 percent.

Required

1. a.      What are the differential costs that would be incurred as a result of adding this new client?
2. b.      Tom would normally charge about $75,000 in fees for the services the store would require. How much could he offer to charge and still not lose money on this client?
3. c.       What considerations, other than costs, are necessary before making this decision?