Howard Cooper, the president of Glacier Computer Services, needs your help. He w

Question

Howard Cooper, the president of Glacier 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: Standard rate and variable costs Service rate per hour $ 60.00 Labor cost 32.00 Overhead cost 5.76 Selling, general, and administrative cost 3.44 Expected fixed costs Facility maintenance $ 320,000 Selling, general, and administrative 120,000 Required Prepare the pro forma income statement that would appear in the master budget if the firm expects to provide 30,000 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 Glacier charges customers $56 per hour, the firm can achieve 38,000 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 $64 per hour, the number of service hours will decline to 25,000. Prepare a flexible budget using the new assumption.

Explanation / Answer

1. Proforma income statement for 30,000 hours service.

2. Proforma income statement for service rate of $56 per hour

3. Proforma income statement for service rate of $64 per hour.

Glacier Computer Services Proforma Income Statement Service Hours 30000 Rate / hr Service Revenue 60.00 1800000 Variable costs Labor cost 32.00 960000 Overhead cost 5.76 172800 SG & A cost 3.44 103200 Total variable costs 1236000 Fixed costs Facility mantenance 320000 SG & A cost 120000 Total Fixed Costs 440000 Total costs 1676000 Net operating income 124000

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