Question

Howard Cooper, the president of Fanning 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 3. $ Standard rate and variable costs Service rate per hour Labor cost Overhead cost Selling, general, and administrative cost Expected fixed costs Facility maintenance Selling, general, and administrative 84.00 34.00 7.10 3.80 $521,000 148,000 Required: a. Prepare the pro forma income statement that would appear in the master budget if the firm expects to provide 37,000 hours of services in Year 3. b. 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 Fanning charges customers $79 per hour, the firm can achieve 44,000 hours of services. Prepare a flexible budget using the consultant's assumption. c. The same consultant also suggests that if the firm raises its rate to $89 per hour, the number of service hours will decline to 29,000. Prepare a flexible budget using the new assumption.

Answer 1

A

Pro Forma Income statement
Master budget

Particulars	Amount ($)
Service revenues (37000 hours X $84)	3108000
Variable costs
Labor cost (37000 hours X $34)	1258000
Overhed cost (37000 hours X $7.10)	262700
Selling, general and administrative (37000 hours X $3.8)	140600
Total variable cost	1661300
Contribution margin	1446700
Fixed costs
Facility maintenance	521000
Selling, general and administrative	148000
Total fixed cost	669000
Net operating income	777700

B

Pro Forma Income statement
Flexible budget

Particulars	Amount ($)
Service revenues (44000 hours X $79)	3476000
Variable costs
Labor cost (44000 hours X $34)	1496000
Overhed cost (44000 hours X $7.10)	312400
Selling, general and administrative (44000 hours X $3.8)	167200
Total variable cost	1975600
Contribution margin	1500400
Fixed costs
Facility maintenance	521000
Selling, general and administrative	148000
Total fixed cost	669000
Net operating income	831400

C

Pro Forma Income statement
Flexible budget

Particulars	Amount ($)
Service revenues (29000 hours X $89)	2581000
Variable costs
Labor cost (29000 hours X $34)	986000
Overhed cost (29000 hours X $7.10)	205900
Selling, general and administrative (29000 hours X $3.8)	110200
Total variable cost	1302100
Contribution margin	1278900
Fixed costs
Facility maintenance	521000
Selling, general and administrative	148000
Total fixed cost	669000
Net operating income	609900

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