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:
1. 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

2. 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

3. Why does the cost per return differ at each of the three volume levels?

Answer 1

Answer:

The company pays $ 500 yearly fee to use Mega Tax Software which is record as fixed costs. Fixed costs do not differ with the variation in the manufacturing levels. Conversely, the fixed cost per unit declines as manufacturing increases, as the same fixed costs are extent over more units. Also the fixed costs per unit rises as the production decreases. Therefore when the production level increased from 300 units to 500 units, the fixed costs per unit reduced and since the variable cost per unit is the same at $ 10 per unit regardless of the levels of production, the total cost per return declines from $ 11.67 to $ 11.