Question

Howard Cooper, the president of Stuart 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 Labor cost Overhead cost Selling, general, and administrative cost Expected fixed costs Facility maintenance Selling, general, and administrative 89.00 40.00 6.60 4.20 $525,000 146,000 Required: a. Prepare the pro forma income statement that would appear in the master budget if the firm expects to provide 34,000 hours of services in 2019. 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 consultants analysis, if Stuart charges customers $84 per hour, the firm can achieve 39,000 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 $94 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 for 34,000 hours of services in 2019 :- Particulars Amounts Revenue (34000*89) 3,026,000 Less: Variable expenses Labour cost (34000*40) 1,360,000 Overhead cost (34000*6.60) 224,400 Selling general and administrative (34000*4.20) 142,800 Less: Fixed expenses Factory Maintenance 525,000 Fixed selling general and administrative 146,000 Total Operating expenses 2,398,200 Net Income 627,800 Amounts 3,276,000 b) Flexible budget at service rate of 84 :- Particulars Revenue (39000*84) Less: Variable expenses Labour cost (39000*40) Overhead cost (39000*6.60) Selling general and administrative (39000*4.20) Less: Fixed expenses Factory Maintenance Fixed selling general and administrative Total Operating expenses Net Income 1,560,000 257,400 163,800 525,000 146,000 2,652,200 623,800 Amounts 2,726,000 c) Flexible budget at service rate of 94:- Particulars Revenue (29000*94) Less: Variable expenses Labour cost (29000*40) Overhead cost (29000*6.60) Selling general and administrative (29000-4.20) Less: Fixed expenses Factory Maintenance Fixed selling general and administrative Total Operating expenses Net Income 1,160,000 191,400 121,800 525,000 146,000 2,144,200 581,800