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 are presented below: TOM’S TAX SERVICES Annual Income Statement Sales revenue $ 720,000 Costs Labor 477,000 Equipment lease 50,400 Rent 43,200 Supplies 32,400 Tom’s salary 75,000 Other costs 22,800 Total costs $ 700,800 Operating profit (loss) $ 19,200 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: a. What are the differential costs that would be incurred as a result of adding this new client?

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 are presented below:

TOM’S TAX SERVICES Annual Income Statement
Sales revenue	$	720,000
Costs
Labor		477,000
Equipment lease		50,400
Rent		43,200
Supplies		32,400
Tom’s salary		75,000
Other costs		22,800
Total costs	$	700,800
Operating profit (loss)	$	19,200

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:

a.	What are the differential costs that would be incurred as a result of adding this new client?

Assume that Carmen's Cookies is preparing a budget for the month ending September 30. Management prepares the budget by starting with the actual results for April that are shown below. Then, management considers what the differences in costs will be between April and September. CARMEN'S COOKIES Retail Responsibility Center Actual Costs For the Month Ending April 30 Actual (April) Food Flour $ 1,600 Eggs 5,000 Chocolate 1,300 Nuts 2,000 Other 1,800 Total food $ 11,700 Labor Manager $ 3,000 Other 1,200 Total labor $ 4,200 Utilities 1,500 Rent 5,000 Total cookie costs $ 22,400 Number of cookies sold 25,000 Management expects cookie sales to be 15 percent greater in September than in April, and it expects all food costs (e.g., flour, eggs) to be 15 percent higher in September than in April because of the increase in cookie sales. Management expects “other” labor costs to be 28 percent higher in September than in April, partly because more labor will be required in September and partly because employees will get a pay raise. The manager will get a pay raise that will increase the salary from $3,000 in April to $3,300 in September. Utilities will be 3 percent higher in September than in April. Rent will be the same in September as in April. Now, fast forward to early October and assume the following actual results occurred in September: Required: a. Prepare a statement that compares the budgeted and actual costs. (Round your final answers to nearest whole dollar. Negative amounts should be indicated by a minus sign.)

Assume that Carmen's Cookies is preparing a budget for the month ending September 30. Management prepares the budget by starting with the actual results for April that are shown below. Then, management considers what the differences in costs will be between April and September.

CARMEN'S COOKIES Retail Responsibility Center Actual Costs For the Month Ending April 30
	Actual (April)
Food
Flour	$	1,600
Eggs		5,000
Chocolate		1,300
Nuts		2,000
Other		1,800
Total food	$	11,700
Labor
Manager	$	3,000
Other		1,200
Total labor	$	4,200
Utilities		1,500
Rent		5,000
Total cookie costs	$	22,400
Number of cookies sold		25,000

Management expects cookie sales to be 15 percent greater in September than in April, and it expects all food costs (e.g., flour, eggs) to be 15 percent higher in September than in April because of the increase in cookie sales. Management expects “other” labor costs to be 28 percent higher in September than in April, partly because more labor will be required in September and partly because employees will get a pay raise. The manager will get a pay raise that will increase the salary from $3,000 in April to $3,300 in September. Utilities will be 3 percent higher in September than in April. Rent will be the same in September as in April.

Now, fast forward to early October and assume the following actual results occurred in September:

Required:

a.	Prepare a statement that compares the budgeted and actual costs. (Round your final answers to nearest whole dollar. Negative amounts should be indicated by a minus sign.)

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 are presented below: TOM’S TAX SERVICES Annual Income Statement Sales revenue $ 738,000 Costs Labor 466,000 Equipment lease 50,300 Rent 42,900 Supplies 32,300 Tom’s salary 74,500 Other costs 20,900 Total costs $ 686,900 Operating profit (loss) $ 51,100 If Tom gets the store’s business, he will incur an additional $59,800 in labor costs. Tomalso estimates that he will have to increase equipment leases by about 5 percent, supplies by 10 percent, and other costs by 10 percent.

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 are presented below:

TOM’S TAX SERVICES Annual Income Statement
Sales revenue	$	738,000
Costs
Labor		466,000
Equipment lease		50,300
Rent		42,900
Supplies		32,300
Tom’s salary		74,500
Other costs		20,900
Total costs	$	686,900
Operating profit (loss)	$	51,100

If Tom gets the store’s business, he will incur an additional $59,800 in labor costs. Tomalso estimates that he will have to increase equipment leases by about 5 percent, supplies by 10 percent, and other costs by 10 percent.

KC Services provides landscaping services in Edisont. Kate Chen,, the owner, is concerned about the recent losses the company has incurred and is considering dropping its lawn services

KC Services provides landscaping services in Edisont. Kate Chen,, the owner, is concerned about the recent losses the company has incurred and is considering dropping its lawn services, which she feels are marginal to the company’s business. She estimates that doing so will result in lost revenues of $51,500 per year (including the lost tree business from customers who use the company for both services). The present manager will continue to supervise the tree services with no reduction in salary. Without the lawn business, Kate estimates that the company will save 15 percent of the equipment leases, labor, and other costs. She also expects to save 21 percent on rent and utilities.

KC SERVICES Annual Income Statement (Before Dropping Lawn Services)
Sales revenue	$	316,000
Costs
Equipment leases	$	192,000
Labor		32,500
Utilities		20,000
Rent		31,200
Other costs		15,500
Manager’s salary		56,800
Total costs	$	348,000
Operating profit (loss)	$	(32,000)

Required :

a.	Prepare a report of the differential costs and revenues if the lawn service is discontinued. (Loss amounts shoud be indicated by minus sign.)

rev: 02_21_2014_QC_45747, 02_24_2014_QC_45747


Explanation:

a.

KC SERVICES Annual Income Statement
	Status Quo:      With Lawn      Service		Alternative:        Without Lawn     Service				Difference
Sales revenue		$ 316,000		$ 264,500		$ (51,500)	(given)
Costs
Equipment leases		192,000		163,200		(28,800)	(= 15% x $192,000)
Labor		32,500		27,625		(4,875)	(= 15% x $32,500)
Utilities		20,000		15,800		(4,200)	(= 21% x $20,000)
Rent		31,200		24,648		(6,552)	(= 21% x $31,200)
Other costs		15,500		13,175		(2,325)	(= 15% x $15,500)
Manager's salary		56,800		56,800		0
Total costs		$ 348,000		$ 301,248		$ (46,752)
Operating profit (loss)		$ (32,000)		$ (36,748)		$ (4,748)

Equipment leases: 15% x $192,000 = 163,200

Labor: 15% x $32,500 = 27,625

Utilities: 21% x $20,000 = 15,800

Rent: 21% x $31,200 = 24,648

Other costs: 15% x $15,500 = 13,175

b.

The decision to drop the lawn service results in a differential loss of $4,748 [=$(32,000) – $ (36,748)], so it is not profitable to drop that service. Note that only differential costs and revenues figured in the decision. The manager's salary did not change, so it did not affect the decision.