Question

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

Direct labor		$	332,000
Variable overhead			312,000
Fixed overhead			248,000
Total cost		$	892,000

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 Ceradyne Tax Service to prepare tax returns for its 120 small-business clients. Ceradyne 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 Ceradyne Tax Service’s current clients. Advantage is willing to pay $900 per tax return.

What will be the effect on Ceradyne Tax Service’s profit if it agrees to prepare returns for the 120 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 increasedecrease by $ per year.

Answer 1

Incremental revenue if Budget Tax Services agrees = $900 x 120 = $108,000

Incremental costs if Budget Tax Services agrees = ($332000 x 120/800) + ($312000 x 120/800) = $96,600

Therefore,

Increase in profit if Budget Tax Services agrees = $108,000 - $96,600 = $11,400