Question

Howard Cooper, the president of Perez 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 89.00 31.00 7.00 4.20 $521,000 145,000 Required: a. Prepare the pro forma income statement that would appear in the master budget if the firm expects to provide 38,000 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 Perez charges customers $84 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 $94 per hour, the number of service hours will decline to 35,000. Prepare a flexible budget using the new assumption. Complete this question by entering your answers in the tabs below. Required A Required B Required C Prepare the pro forma income statement that would appear in the master budget if the firm expects to provide 38,000 hours of services in Year 3. PEREZ COMPUTER SERVICES Pro Forma Income Statement Master Budget Variable costs: Fixed costs:

Answer 1

a)

PEREZ COMPUTER SERVICES Pro forma income statement Master budget $3382000 Sales (-) variable cost: Labor cost Overhead cost Selling, general, and administrative Contribution margin (-) fixed cost: Facility maintenance Selling, general, and administrative Net income $1178000 $266000 $159600 $1778400 $521000 $145000 $1112400 calculations: sales = total units * selling price per unit = 38000*$89 =$3382000 Labor cost =38000*$31 = $1178000 Overhead cost = 38000*$7 = $266000 Selling, general, administrative =38000*$4.2 = $159600

b)

PEREZ COMPUTER SERVICES Pro forma income statement Master budget $3696000 Sales (-) variable cost: Labor cost Overhead cost Selling, general, and administrative Contribution margin (-) fixed cost: Facility maintenance Selling, general, and administrative Net income $1364000 $308000 $184800 $1839200 $521000 $145000 $1173200 Note: when selling price and sales volume is changed, variable cost per unit and fixed cost in total remains same. But, variable cost in total changes. calculations: sales = total units * selling price per unit = 44000*$84 =$3696000 Labor cost =44000*$31 =$1364000 Overhead cost = 44000*$7 = $308000 Selling, general, administrative =44000*$4.2 = $184800

c)

Pro forma income statement Master budget $3290000 Sales (-) variable cost: Labor cost Overhead cost Selling, general, and administrative Contribution margin (-) fixed cost: Facility maintenance Selling, general, and administrative Net income $1085000 $245000 $147000 $1813000 $521000 $145000 $1147000 calculations: sales = total units * selling price per unit = 35000*$94 =$3290000 Labor cost =35000*$31 = $1178000 Overhead cost = 35000*0$ 7 = $245000 Selling, general, administrative =35000*$4.2 = $147000