Question

Leary and O'Donnell, a local CPA firm, has been asked to bid on a contract to perform audits for three counties in its home state. Because existing staff are fully scheduled, If the firm is awarded the contract, it must hire one new staff member at a salary of $65,000 to handle the additional workload. The managing partner is convinced that obtaining the contract will lead to additional new clients from the respective counties. Expected new work (excluding the three counties) is 880 hours at an average billing rate of $90 per hour. Other information follows about the firm's current annual revenues and costs Firm volume in hours (normal) Fixed costs Variable cost 30,750 $575,000 $ 35/hr Should the firm win the contract, the audits of the three counties will require 820 hours of expected work. Required: 1. If the managing partner's expectations are correct, what is the lowest bid the firm can submit and still expect to increase annual net Income? What would be the hourly billing rate for the county audit jobs just to break even on all the new business? (Round "Average billing rate" answer to 2 decimal places.) 2. If the contract is obtained at a price of $45,300, what is the minimum number of hours of new business in addition to the county work that must be obtained for the firm to break even on total new business? What is the margin of safety (MOS) regarding the county audit job proposal? per hour 1. Lowest revenue Average billing rate 2. Minimum number of hours Margin of safety (MOS) hours < Prev 2 of 2 Next

Answer 1

Answer:

1.)

Calculation of the lowest bid
Particulars	Amount ($)
Cost of the required Additional staff	65000
Add: Variable cost is incurred for the profits (820 hours x $35 / hour)	28700
	93700
Less: Additional contribution for earned on new work (880 hours x (90 -35))	(79200)
The lowest bid Amount	14500
Number of hours	820
Hourly billing rate (14500/820 hrs)	17.68

2.)

If the contact is obtained at a price of $14500, minimum number of hours of new business in addition to the country work should be 880 hours.