Ross and Jones, Certified Public Accountants, 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 filing deadline. 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 more recent customer is John Crowe. His documentation is well organized, and he brings it into the firm three months before the filing 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 and usually files extensions for a number of clients because there is not enough time to complete all of the returns before the April 15 deadline. Partners and staff work 14 to 18 hour 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 labor hour.

REQUIRED

A. Which customer is more profitable?

B. At what flat fee for Mabel’s return would the firm be indifferent between the two clients, assuming no time constraints for completing the returns?

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.