Howard Cooper, the president of Adams Computer Services, needs your help. He won

Question

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

Explanation / Answer

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

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