Question

2.26 (LO 3) Excel Contribution format income statement; decision making Harris Horticulture provides and maintains live plants in office buildings. The company's 850 customers are charged $40 per month for this service, which includes weekly watering visits. The variable cost to service a customer's location is $20 per month. The company incurs $2,000 each month to maintain its fleet of four service vans and $3,000 each month in salaries. Harris pays a bookkeeping service $3 per customer each month to handle all invoicing and accounting functions. Required a. Prepare Harris's contribution format income statement for the month. b. What is the expected monthly operating income if 150 customers are added? c. Mr. Harris is exploring two options to reduce the annual bookkeeping costs. Option 1: Renegotiate the current contract with the bookkeeping service to pay a flat fee of $20,400 per year plus $i per customer per month. Option 2: Hire a part-time bookkeeper for $27,000 per year to handle the invoicing and simple accounting. He would need to pay $5,000 per year to have taxes and year-end financial statements prepared. Compare the current bookkeeping cost with the two options under consideration at customer levels of 850, 1,000, and 1,100. d. Besides the bookkeeping costs incurred, what should Mr. Harris consider before he makes a change in bookkeeping services?

Answer 1

Part A

Selling price per customer			$                40
Variable cost per customer
Visit cost per customer		$             20
Bookkeeping		$                3
Variable cost per customer			$                23
Fixed cost per month
Maintain service vans		$       2,000
Salaries expenses		$       3,000
Total fixed cost per month			$          5,000
Contribution margin format income statement (850 Customers)
Sales revenue (850*40)			$        34,000
Less: variable cost (850*23)			$        19,550
Contribution margin			$        14,450
Less: fixed cost			$          5,000
Net operating income			$          9,450

Part B

If 150 customer added then total customers would be 1,000 (850 + 150).
Contribution margin format income statement (850 Customers)
Sales revenue (1000*40)			$        40,000
Less: variable cost (1000*23)			$        23,000
Contribution margin			$        17,000
Less: fixed cost			$          5,000
Net operating income			$        12,000

Part C

	Current option	Option 1	Option 2
Variable cost per customer per year
Bookkeeping (Current = 3 x12) (option 1 = 1 x12)	$                  36	$             12	$                 -
Variable cost per customer	$                  36	$             12	$                 -
Fixed cost per annum
Bookkeeping (option 2 = 27000+5000)	$                   -	$     20,400	$        32,000
Total fixed cost per annum	$                   -	$     20,400	$        32,000
Customer level :	850	Customers
	Current option	Option 1	Option 2
Variable cost per customer	$                  36	$             12	$                 -
Multiply: number of customers	850	850	850
Variable cost	$          30,600	$     10,200	$                 -
Fixed cost (add)	$                   -	$     20,400	$        32,000
Total annual bookkeeping costs	$          30,600	$     30,600	$        32,000
Customer level :	1,000	Customers
	Current option	Option 1	Option 2
Variable cost per customer	$                  36	$             12	$                 -
Multiply: number of customers	1,000	1,000	1,000
Variable cost	$          36,000	$     12,000	$                 -
Fixed cost (add)	$                   -	$     20,400	$        32,000
Total annual bookkeeping costs	$          36,000	$     32,400	$        32,000
Customer level :	1,100	Customers
	Current option	Option 1	Option 2
Variable cost per customer	$                  36	$             12	$                 -
Multiply: number of customers	1,100	1,100	1,100
Variable cost	$          39,600	$     13,200	$                 -
Fixed cost (add)	$                   -	$     20,400	$        32,000
Total annual bookkeeping costs	$          39,600	$     33,600	$        32,000

Part D

Mr harris should consider his future demands of services before he makes a change in bookkeeping services. If the expected demand is less than 850 customers, the current option would be selected. If expected demand is more than 850 customers, options 1 or 2 would be selected.