Forman’s Services is a small accounting firm that offers payroll and bookkeeping services to small businesses and individuals. A local merchant has approached Will Forman, the owner, about taking over his payroll disbursements but is concerned about the fees Forman’s normally charges. The costs and revenues at Forman’s Services follow.

If Forman’s gets the merchant’s business, it will incur an additional $30,000 in labor costs. Will also estimates that he will have to increase equipment leases by about 10 percent, supplies by 15 percent, and other costs by 5 percent. There will be no additional rent.

 

Required

a. What are the differential costs that would be incurred as a result of adding this new client?

b. Will would normally charge about $50,000 in fees for the services the store would require. How much could he offer to charge and still not lose money on this client?

c. What considerations, other than costs, are necessary before making this decision?

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1234 A FORMAN'S SERVICES Annual Income Statement 4 Sales revenue... 5 Costs 6 Labor...... 7 Equipment lease. 8 Rent....... 9 Supplies....... 10 Owner's salary.. 11 Other costs... 12 Total costs..... 13 Operating profit (loss).. 14 15 $ 1,080,000 B ISIS $ 1,051,200 28,800 $ 715,500 75,600 64,800 48,600 112,500 34,200