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 $59.000 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 820 hours at an average billing rate of $90 per hour. Other information follows about the firm's current annual revenues and costs: Firm 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 880 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 $44,700, 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 Lowest revenue Average billing rate Minimum number of hours Margin of safety (MOS) hours

Answer 1

Answer 1

Leary and O Donnell , a local CPA firm
To bid on a contract to peform Audit for three
counties in its home state
Planning to hire one New Staff Member with Salary cost of $59000
With expected new work is 820 hrs at an Average rate $90 / hr
Variable cost $/hr		35
Firm require 880 hrs of expected work
We need to calculate Bid Price ( Lowest )
Also Hourly Billing Rate				Amnt($)
Salar cost of additional Person hire				59,000
Add
Addition hrs require to meet additional
client === 880 Hrs
Variable cost ==880 Hrs * $35/ hr				30,800
Total cost =a				89,800
Less - Contribution =b
820 Hrs * ( $ 90/ hr- $ 35/ Hr)				45,100
Minimum Bidding cost(a-b)=C				44,700
Additional Hrs require-D				880
Rate per hr ($/ hr(C/D)				50.80

Answer - 2 - If the contract is obtained at $ 44700 , then minimum hrs would be 820 Hr  in addition to the County Work

Margin of safety is represents amount which is more than Break Even Point . In this case , If Audit firm is bidding at $ 44700 Minimum bidding which represents break Even Point ,then Margin of Safety amount will be Nil.