(Allocation ofscarce resources) John Henry received his accounting degree in 1972. Since receiving his degree, Mr. Henry has obtained significant experience in a variety of job settings. His skills include auditing, income and estate taxation, and business consulting. Mr. Henry currently has his own practice and his skills are in such demand that he limits his practice to taxation issues. Most of his engagements are one of three types: individual income taxation, estate taxation, or corporate taxation. Below are data pertaining to the revenues and costs of each tax area (per tax return).

Fixed costs of operating Mr. Henry’s office are $40,000 per year. Mr. Henry has such significant demand for his work that he must ration his time. He desires to work no more than 2,500 hours in the coming year. He can allocate his time such that he works only on one type of tax return or on any combination of the three types.

a. How should Mr. Henry allocate his time in the coming year to maximize his income?

b. Based on the optimal allocation, what is Mr. Henry’s projected pretax income for the coming year?

c. What other factors should Mr. Henry consider in allocating his time?LO1

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Revenue Variable costs Hours per return required of Mr. Henry INDIVIDUAL ESTATE CORPORATE $350 $1,200 $750 $ 50 $ 200 $150 2 8 5