Context-sensitive nature of cost behavior classifications Warren and Carter Tax Services’ Development Department is responsible for establishing new community branches. Each branch opens with two tax accountants. Total cost of payroll per branch is $108,000 per year. Together the two accountants can process up to 2,500 simple tax returns per year. The firm’s policy requires closing branches that do not reach the quota of 1,500 tax returns per year. On the other hand, the firm hires an additional accountant for a branch and elevates it to the status of a regular operation if the customer demand for services exceeds 2,500 tax returns.
Required
a. What is the relevant range of activity for a new branch established by the Development Department?
b. Determine the amount of payroll cost in total and the average payroll cost per transaction for a branch that processes 1,500, 2,000, or 2,500 tax returns. In this case (the activity base is the number of tax returns for a specific branch), is the payroll cost a fixed or a variable cost?
c. Determine the amount of payroll cost in total and the average payroll cost per branch for Warren and Carter Tax Services, assuming that the Development Department operates 20, 30, or 40 branches. In this case (the activity base is the number of branches), is the payroll cost a fixed or a variable cost?