LaNora White received her accounting
degree in 1992. Since graduating, she has obtained significant experience in a variety of
job settings. Her skills include auditing, income and estate taxation, and business consulting.
White currently has her own practice, and her skills are in such demand that
she limits her practice to taxation issues. Most of her engagements are one of three
types: individual income taxation, estate taxation, or corporate taxation. Following are
data pertaining to the revenues and costs of each tax area (per tax return):
Individual Estate Corporate
Revenue $350 $1,200 $750
Variable cost $ 50 $ 200 $150
Hours per return of White’s time 2 8 5
Fixed costs of operating the office are $80,000 per year. White has such significant
demand for her work that she must ration her time. She desires to work no more than
2,000 hours in the coming year. She can allocate her time so that she works only on
one type of tax return or on any combination of the three types.
a. How should White allocate her time in the coming year to maximize her income?
b. Based on the optimal allocation, what is White’s projected pre-tax income for the
coming year?
c. What other factors should White consider in allocating her time?
d. What could White do to overcome the scarce resource constraint?