Question

Howard Cooper, the president of Munoz 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 2019.

Standard rate and variable costs
Service rate per hour	$	82.00
Labor cost		32.00
Overhead cost		6.50
Selling, general, and administrative cost		3.30
Expected fixed costs
Facility maintenance	$	523,000
Selling, general, and administrative		143,000

Required:

1. Prepare the pro forma income statement that would appear in the master budget if the firm expects to provide 43,000 hours of services in 2019.

2. 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 Munoz charges customers $77 per hour, the firm can achieve 52,000 hours of services. Prepare a flexible budget using the consultant’s assumption.

3. The same consultant also suggests that if the firm raises its rate to $87 per hour, the number of service hours will decline to 37,000. Prepare a flexible budget using the new assumption.

Prepare the pro forma income statement that would appear in the master budget if the firm expects to provide 43,000 hours of services in 2019.

	MUNOZ COMPUTER SERVICES Pro Forma Income Statement Master Budget Variable costs: Fixed costs:

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 Munoz charges customers $77 per hour, the firm can achieve 52,000 hours of services. Prepare a flexible budget using the consultant’s assumption.

	MUNOZ COMPUTER SERVICES Pro Forma Income Statement Flexible Budget Variable costs: Fixed costs: The same consultant also suggests that if the firm raises its rate to $87 per hour, the number of service hours will decline to 37,000. Prepare a flexible budget using the new assumption. MUNOZ COMPUTER SERVICES Pro Forma Income Statement Flexible Budget Variable costs: Fixed costs:

Answer 1

a)
	Particulars				Amount
	Revenue from services				$ 3,526,000.00
	( 43000 hrs x $ 82)
Less:	Variable Costs:
	Labor cost	( 43000 hrs x $ 32)		$ 1,376,000.00
	Overhead	( 43000 hrs x $ 6.5)		$      279,500.00
	SG&A	(43000 hrs x $ 3.3)		$      141,900.00	$ 1,797,400.00
	Contribution margin				$ 1,728,600.00
Less:	Fixed costs :
	Facility maintenance			$      523,000.00
	SG&A			$      143,000.00	$      666,000.00
	Net Income				$ 1,062,600.00

b)
	Particulars				Amount
	Revenue from services				$ 4,004,000.00
	(52000 hrs x $ 77)
Less:	Variable Costs:
	Labor cost	(52000hrs x $ 32)		$ 1,664,000.00
	Overhead	(52000 hrs x $ 6.5)		$      338,000.00
	SG&A	( 52000 hrs x $ 3.3)		$      171,600.00	$ 2,173,600.00
	Contribution margin				$ 1,830,400.00
Less:	Fixed costs :
	Facility maintenance			$      523,000.00
	SG&A			$      143,000.00	$      666,000.00
	Net Income				$ 1,164,400.00

c)
	Particulars				Amount
	Revenue from services				$ 3,219,000.00
	(37000 hrs x $ 87)
Less:	Variable Costs:
	Labor cost	(37000 hrs x $ 32)		$ 1,184,000.00
	Overhead	(37000 hrs x $ 6.5)		$      240,500.00
	SG&A	(37000 hrs x $ 3.3)		$      122,100.00	$ 1,546,600.00
	Contribution margin				$ 1,672,400.00
Less:	Fixed costs :
	Facility maintenance			$      523,000.00
	SG&A			$      143,000.00	$      666,000.00
	Net Income				$ 1,006,400.00