Question

After working for a software company for several years, Chris and Terry quit their jobs and set up their own consulting firm called C & T Software, Inc. Major customers include corporate, professional, and government organizations that are setting up information networks. The cost per billable hour of service at the company’s normal volume of 3,000 billable hours per month follows. (A billable hour is one hour billed to a client.) Average cost per hour billed to client: Variable labor—consultants $50 Variable overhead, including supplies and clerical support 20 Fixed overhead, including allowance for unbilled hours 80 $150 Marketing and administrative costs per billable hour (all fixed) 40 Total hourly cost $190 Treat each of the following questions independently. Unless given otherwise, the regular fee per hour is $200.How many hours must the firm bill per month to break even? (You may need to refer to Chapter 5 to answer this question.) b. Market research estimates that a fee increase to $250 per hour would decrease monthly volume to 2,000 hours. The accounting department estimates that fixed overhead costs would be $120 per hour, while variable cost per hour would remain unchanged. What effect would a fee increase have on profits? c. Assume C & T Software is operating at its normal volume of 3,000 hours per month. It has received a special request from one of its long-time customers to provide services on a special-order basis. Because of the long-term nature of the contract (four months) and the magnitude (1,000 hours per month), the customer believes a fee reduction is in order. C & T Software has a capacity limitation of 4,000 hours per month. Fixed costs would not change if the firm accepts the special order. What is the lowest fee C & T Software would be willing to charge?

Answer 1