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 $69,000 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 920 hours at an average billing rate of $90 per hour. Other information follows about the firm's current annual revenues and costs: Firn 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 780 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 $45,700, 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 Minimum number of hours Margin of safety (MOS) hours

Answer 1

Cost of additional staff required = $69000

Variable cost to be incurred for audits ( 780 hours* 35 / hr) = 27,300‬

69000+27300 = 96,300

Additional contribution to be earned on new work = 920 hours * ( 90 - 35) = 50,600

96,300 - 50,600 = $45,700

Lowest revenue = $45,700

Number of hours = 780

Average billing rate = 45,700 / 780 = 58.59 per hour

If the contract price would have been $45,700 then minimum hours of additional work would have been 920 hours as justified by 1st answer.

Minumum number of hours = 920 hours

Margin of safety is the amount over and above break even point but if the contract would have been obtained for the amount of $45,700 then it itself is at break even point and thus margin of safety in that case would have been nil.

Margin of safety(MOS) = 0

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