Reference no: EM132658162

Ross and Jones CA is a well-established accounting firm with two partners and four staff in a small, rural town. The firm performs financial statement reviews and compilations and prepares tax returns for local companies and individuals. One partner is concerned that several long-time individual clients may not be profitable and should be dropped.

One of these customers is Mabel Farley. Her documentation is highly disorganized, and she brings it into the firm five days before the filling deadlines. Her tax return requires about 6 hours of staff time and 1 hour of partner time. She has been paying a flat fee of $300 each year.

A most recent customer is John Crowe. His documentation is well organized, and he brings it into the firm three months before the filling deadline. His financial dealings require a fairly complex tax return. His return requires 1 hour of staff time and 2 hours of partner time. John pays based on time at a rate of $140 per hour.

The firm is operating at capacity during tax season. Partners and staff work 14-18 hours days in March and April. Staff members are paid $20 per hour, and partners are paid $100 per hour. Fixed overhead costs such as rent are allocated to each job at a rate of $50 per partner labour hour.

Question A. Which customer is more profitable?

Question B. At what flat fee for Mabel's return would the firm be indifferent between the two clients?

Question C. Ross and Jones can drop Mabel as a client, increase her fee, or not change anything. List two qualitative factors that could affect this decision and present your recommendations.