Salida LLP provides two kinds of services to clients: telephone answering and billing. Because Salida’s clients for each type of service are approximately the same size, the company has standardized fees for its services: $3,600 per month for telephone answering and $5,000 per month for billing. The company has three telephone clients for every two billing clients. Variable costs of the services are $2,160 for telephone clients and $3,810 for billing clients. Fixed costs are $2,345,000 per year.
Required:
(a) How many telephone clients and billing clients are needed to break even each year?
(b) If Salida LLP has a tax rate of 35 percent, how many telephone clients and billing clients are needed to earn an after-tax income of $217,750?
(c) Salida LLP currently has 2,460 telephone answering clients and 1,640 billing clients. What is Salida’s pretax income? The company is considering lowering fees for telephone answering and billing clients to $3,200 and $4,400, respectively. If this change is made and no new clients are added, how many dollars of fixed costs can the company incur and
Still maintain the same pretax income as is currently being generated?
(d) Use original data. Salida LLP is considering raising the fee for billing clients to $6,350. If this increase were made, the telephone answering to billing client ratio would decline to 3:1. How many telephone clients and billing clients would be needed to break even each year if fixed costs do not change?
(e) What circumstances might affect Salida’s ability to use the current financial data to calculate BEP or other CVP factors over the next three years?