Homework SourseHoward Cooper the president of Adams Computer Services needs
Howard Cooper, the president of Adams Computer Services, needs your help. He wonders about the potential effects on the firm’s net income if he changes the service rate that the firm charges its customers. The following basic data pertain to fiscal year 2019.
Required:
Prepare the pro forma income statement that would appear in the master budget if the firm expects to provide 32,000 hours of services in 2019.
A marketing consultant suggests to Mr. Cooper that the service rate may affect the number of service hours that the firm can achieve. According to the consultant’s analysis, if Adams charges customers $80 per hour, the firm can achieve 37,000 hours of services. Prepare a flexible budget using the consultant’s assumption.
The same consultant also suggests that if the firm raises its rate to $90 per hour, the number of service hours will decline to 24,000. Prepare a flexible budget using the new assumption.
| Standard rate and variable costs | |||
| Service rate per hour | $ | 85.00 | |
| Labor cost | 36.00 | ||
| Overhead cost | 6.50 | ||
| Selling, general, and administrative cost | 3.70 | ||
| Expected fixed costs | |||
| Facility maintenance | $ | 524,000 | |
| Selling, general, and administrative | 146,000 | ||
Solution
Master budget:
Service rate per hour
$85/ per hour
Expected service hours (Hours)
32000
(A): Service revenue ( service rate x Service hours)
2720000
Expenditures
Labour costs
(32000 x 36)
1152000
Overhead costs
(32000 x 6.5)
208000
Selling, general and administrative expenses
(32000 x 3.7)
118400
Facility maintenance
524000
Selling general and administrative fixed costs
146000
(B): Total expenditures
2148400
Profit (A-B)
571600
Flexible budget for three different service rates:
Service rate per hour
$80/ per hour
$85/ per hour
$90/ per hour
Expected service hours (Hours)
37000
32000
24000
(A): Service revenue ( service rate x Service hours)
2960000
2720000
2160000
Expenditures
Labour costs
(37000 x 36)
1332000
(32000 x 36)
1152000
(24000 x 36)
864000
Overhead costs
(37000 x 6.5)
240500
(32000 x 6.5)
208000
(24000 x 6.5)
156000
Selling, general and administrative expense
(37000 x 3.7)
136900
(32000 x 3.7)
118400
(24000 x 3.7)
88800
Facility maintenance
524000
524000
524000
Selling general and administrative fixed costs
146000
146000
146000
(B): Total expenditures
2379400
2148400
1778800
Profit (A-B)
580600
571600
381200
| Service rate per hour | $85/ per hour |
| Expected service hours (Hours) | 32000 |
| (A): Service revenue ( service rate x Service hours) | 2720000 |
| Expenditures | |
| Labour costs | |
| (32000 x 36) | 1152000 |
| Overhead costs | |
| (32000 x 6.5) | 208000 |
| Selling, general and administrative expenses | |
| (32000 x 3.7) | 118400 |
| Facility maintenance | 524000 |
| Selling general and administrative fixed costs | 146000 |
| (B): Total expenditures | 2148400 |
| Profit (A-B) | 571600 |
