Will Jones, LLP is a small CPA firm that focuses primarily on preparing tax retu
ID: 2329856 • Letter: W
Question
Will Jones, LLP is a small CPA firm that focuses primarily on preparing tax returns for small businesses. The company pays a $500 annual fee plus $10 per tax return for a license to use Mega Tax software.
Required
What is the company’s total annual cost for the Mega Tax software if:
Annual Fee – $500
License Fee per Return – $10
Total Cost
300
500 + 10 x 300 =
$3,500
400
500 + 10 x 400 =
$4,500
500
500 + 10 x 500 =
$5,500
What is the company’s cost per return for the Mega Tax software if:
300
Total cost/units = $3,500 / 300 =
$11.67
400
$4,500 / 400 =
$11.25
500
$5,500 / 500 =
$11.00
Why does the cost per return differ at each of the three volume levels?
What is the company’s total annual cost for the Mega Tax software if:
Annual Fee – $500
License Fee per Return – $10
Total Cost
300
500 + 10 x 300 =
$3,500
400
500 + 10 x 400 =
$4,500
500
500 + 10 x 500 =
$5,500
What is the company’s cost per return for the Mega Tax software if:
300
Total cost/units = $3,500 / 300 =
$11.67
400
$4,500 / 400 =
$11.25
500
$5,500 / 500 =
$11.00
Explanation / Answer
The company pays $ 500 annual fee to use Mega Tax Software. These are fixed costs .Fixed costs do not vary with the change in the production levels. However, the fixed cost per unit decreases as production increases, because the same fixed costs are spread over more units. Similarly the fixed costs per unit increases as the production decreases. Therefore when the production level increased from 300 units to 500 units , the fixed costs per unit decreased and since the variable cost per unit is the same at $ 10 per unit irrespective of the levels of production, the total cost per return decreases from $ 11.67 to $ 11.
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