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 Labor cost Overhead cost Selling, general, and administrative cost Expected fixed costs Facility maintenance Selling, general, and administrative 82.00 37.00 6.40 3.40 $518,000 141,000 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 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 consultant's analysis, if Munoz charges customers $77 per hour, the firm can achieve 46,000 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 $87 per hour, the number of service hours will decline to 29,000. Prepare a flexible budget using the new assumption.

Answer 1

MUNOZ COMPUTER SERVICES Pro Form Income Statement Master Budget $ 3,034,000 37000 x 82 Service Revenue Variable cost: Labor cost Overhead Cost Selling & Administrative Cost Total Variable Cost Contribution margin $ $ $ $ $ 1,369,000 37000 x 37 236,800 37000 x 6.40 125,800 37000 x 3.40 1,731,600 1,302,400 Fixed Cost : Facility Maintenance Selling General & administrative Total Fixed Cost Net Operating Income 518,000 Given 141,000 Given 659,000 643,400 $ $ MUNOZ COMPUTER SERVICES Pro Form Income Statement Flexible Budget $ 3,542,000 46000 x 77 Service Revenue Variable cost: Labor cost Overhead Cost Selling & Administrative Cost Total Variable Cost Contribution margin $ $ $ $ $ 1,702,000 46000 x 37 294,400 46000 x 6.40 156,400 46000 x 3.40 2,152,800 1,389,200 Fixed Cost : Facility Maintenance Selling General & administrative Total Fixed Cost Net Operating Income $ $ $ $ 518,000 Given 141,000 Given 659,000 730,200 MUNOZ COMPUTER SERVICES Pro Form Income Statement Flexible Budget $ 2,523,000 29000 x 87 Service Revenue Variable cost: Labor cost Overhead Cost Selling & Administrative Cost Total Variable Cost Contribution margin $ $ $ $ $ 1,073,000 29000 x 37 185,600 29000 x 6.40 98,600 29000 x 3.40 1,357,200 1,165,800 $ Fixed Cost : Facility Maintenance Selling General & administrative Total Fixed Cost Net Operating Income 518,000 Given 141,000 Given 659,000 506,800