AccuTax Incorporation provides tax services to small firms and individuals. It expects to have the following revenues from preparing tax returns for the year ended December 31, 2022:

Tax returns for business firms		$ 1,000,000
Individual tax returns:
Simple returns	$ 1,640,000
Complex returns	1,200,000	2,840,000
Total revenues		$ 3,840,000

The firm has 2 partners, 8 senior consultants, and 20 consultants. On average, a partner works 50 hours a week and is paid $250,000 a year. Both senior consultants and consultants are expected to work 40 hours a week and are paid, respectively, $90,000 and $60,000 a year. The annual compensation for supporting staff is $40,000 per full-time equivalent. The number of supporting staff varies with the size of the firm. In general, one supporting staff person is needed for every 2 partners, one for every 4 senior consultants, and one for every 10 consultants. After allowing for vacation, sickness, and continuing education days, the weeks per year available to work with clients are 40 weeks for each partner, 45 weeks for each senior consultant, and 48 weeks for each consultant. All partners and senior consultants are full-time professional staff members. 

The firm estimates the following required proportions of professional staff times for each hour spent to complete each of the three different classifications of tax returns:

	Business Return	Simple Individual	Complex Individual
Partner	40%	—	10%
Senior consultant	60%	10%	40%
Consultant	—	90%	50%

General and administrative expenses are estimated as $150,000 per year, plus 10 percent of the total payroll. The firm charges $250 per hour for business returns, $100 per hour for individual returns with complicated tax matters, and $50 per hour for simple individual tax returns. 

The budgeted revenues and the total hours for each of the returns for the coming year are as follows:

	Budgeted Revenue		Hourly Charge Rate		Required Hours
Business returns	$ 1,000,000	÷	$250	=	4,000
Individual returns:
Simple returns	1,640,000	÷	50	=	32,800
Complex returns	1,200,000	÷	100	=	12,000
Total	$ 3,840,000				48,800

The following table shows the professional staff requirements for the budgeted revenue:

	Total Hours	Partner	Senior Consultant	Consultant
Business returns	4,000	1,600	2,400	—
Complex individual returns	12,000	1,200	4,800	6,000
Simple individual returns	32,800	—	3,280	29,520
Total hours	48,800	2,800	10,480	35,520
Hours per week (given)		÷ 50	÷ 40	÷ 40
		56	262	888
Weeks per year per professional staff (given)		÷ 40	÷ 45	÷ 48
Number of professional staff members needed		1.4	5.8	18.5

The budget shows that AccuTax has sufficient professional staff to support the expected activity. Assuming AccuTax plans no change in personnel and maintains the same staff level, its budgeted operating income will be $808,000, as shown in Exhibit 10.18.

Refer to the AccuTax Incorporated information (posted above) of the partners is planning to retire at the end of the year. May Higgins, the sole remaining partner, plans to add a manager at an annual salary of $92,040. She expects the manager to work, on average, 45 hours a week for 45 weeks per year. She plans to change the required staff time for each hour spent to complete a tax return to the following:

	Business Return		Complex Individual Return		Simple Individual Return
Partner	0.4	hour	0.07	hour	—
Manager	0.1	hour	0.13	hour	—
Senior consultant	0.5	hour	0.40	hour	0.2	hour
Consultant	—		0.40	hour	0.8	hour

The manager is salaried and earns no overtime pay. Senior consultants are salaried but receive time and a half for any overtime worked. The firm plans to keep all the senior consultants and adjust the number of consultants as needed including employing part-time consultants, who also are paid on an hourly basis. Higgins has also decided to have five supporting staff at $53,000 each. All other operating data remain unchanged. The manager will share 7% of any profit over $470,000 before bonus.

Required:

1. What are the budgeted total cost for overtime hours worked by senior consultants?

2. How many full-time consultants should be budgeted?

3. Determine the manager’s total compensation and total pretax operating income for the firm, assuming that the revenues from preparing tax returns remain unchanged.

Answer rating: 100% (QA)

1 To calculate the budgeted total cost for overtime hours worked by senior consultants we first need to determine the number of overtime hours worked by senior consultants on complex individual return... View the full answer