Sophie Chang, CPA, is a sole proprietor. Sophie does corporate, partnership, and individual tax returns. Her major constraint and only cost is her time. On average, the revenues and time required for different types of tax returns are: Type of Tax Return Time in Hours Revenues/Tax Return Corporate 20 $2,000 Partnership 10 1,200 Individual 5 400 Which type of tax return should Sophie prepare, if she has plenty of opportunities to do all three types?

Since variable costs are zero (other than the opportunity cost of Sophie’s time), the contribution margin of doing each type of tax return is equal to the revenue. The contribution margin per use of the scarce resource (hour of Sophie’s time) for each type of tax return is: Tax Return Contribution Margin/Hour Corporate $100/hour Partnership $120/hour Individual $80/hour The partnership tax return has the highest contribution margin per hour of Sophie’s time and is the preferred tax return to prepare. Of course, Sophie also needs to consider the long-term effects on her practice if she only prepares partnership returns.

Question 12.12: Sophie Chang, CPA, is a sole proprietor. Sophie does corpora...

Management Accounting in a Dynamic Environment

Sophie Chang, CPA, is a sole proprietor. Sophie does corporate, partnership, and individual tax returns. Her major constraint and only cost is her time. On average, the revenues and time required for different types of tax returns are:

Type of Tax Return	Time in Hours	Revenues/Tax Return
Corporate	20	$2,000
Partnership	10	1,200
Individual	5	400

Which type of tax return should Sophie prepare, if she has plenty of opportunities to do all three types?

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Since variable costs are zero (other than the opportunity cost of Sophie’s time), the contribution margin of doing each type of tax return is equal to the revenue. The contribution margin per use of the scarce resource (hour of Sophie’s time) for each type of tax return is:

Tax Return	Contribution Margin/Hour
Corporate	$100/hour
Partnership	$120/hour
Individual	$80/hour

The partnership tax return has the highest contribution margin per hour of Sophie’s time and is the preferred tax return to prepare. Of course, Sophie also needs to consider the long-term effects on her practice if she only prepares partnership returns.