kimmoy
Apr 4, 2013, 09:39 AM
Maxine Sharpe CVP Case
Maxine Sharpe and two of her friends are considering opening a management consultancy practice in Jamaica to assist small businesses with inexpensive business services such as accounting, operational planning, financial advice and so on. The intent is to provide easy access for their clients by having the office open 360 days per year, 16 hours each day from 7:00 a.m. to 11:00 p.m. The office would be staffed by a senior consultant, assistant consultant, office manager, and clerk-receptionist for each of the two eight-hour shifts.
In order to determine the feasibility of the project, Sharpe sought the assistance of a marketing consultant to help with market projections. The results of this study showed that if the firm spends $980,000 on advertising the first year, the number of new clients expected each day will be 50. Sharpe and her associates believe this number is reasonable and are prepared to spend the $980,000 on advertising. Other pertinent information about the operation of the office follows:
The cost of office supplies has been estimated to be $50 per expected new client consultation.
It will be necessary for the firm to purchase malpractice insurance, which is expected to cost $360,000 annually.
The initial investment in the office equipment will be $120,000. This equipment has an estimated useful life of four years.
The firm will charge each new client $300 for the first 180 days. However, for the remainder of the year, clients will be charged $413.98. It is not expected that there will be repeat clients during the first year of operations.
The hourly wages of the staff are projected to be $50 for the senior consultant, $40 for the assistant consultant, $30 for the office manager, and $20 for the clerk-receptionist. Fringe benefit expense will be 40 percent of the wages paid. A total of 400 hours of overtime is expected for the year; this will be divided equally between the office manager and the clerk-receptionist positions. Overtime will be paid at one-half times the regular wage.
Sharpe has located 6,000 square feet of suitable office space which rents for $56 per square foot annually. Associated expenses will be $54,000 for property insurance and $74,000 for utilities.
Required:
1. Determine how many new clients must visit the office being considered by Maxine Sharpe and her friends in order for the venture to breakeven during the first year of operations. In addition, tell Maxine what her sales in dollar value at the break-even point should be. (Cost driver – initial consultation)
2. Write a report to Maxine Sharpe discussing the following issues:
a. Your breakeven calculation.
b. Five (5) limitations of your breakeven calculation.
c. The entity’s safety margin with an explanation of the concept.
d. Due to circumstances regarding Jamaica’s discussions with the IMF, Maxine Sharpe and her friends believe the tax rate of Jamaica may increase to 40%. How many new clients should visit the venture so they can attain an after tax profit of $600,000?
Maxine Sharpe and two of her friends are considering opening a management consultancy practice in Jamaica to assist small businesses with inexpensive business services such as accounting, operational planning, financial advice and so on. The intent is to provide easy access for their clients by having the office open 360 days per year, 16 hours each day from 7:00 a.m. to 11:00 p.m. The office would be staffed by a senior consultant, assistant consultant, office manager, and clerk-receptionist for each of the two eight-hour shifts.
In order to determine the feasibility of the project, Sharpe sought the assistance of a marketing consultant to help with market projections. The results of this study showed that if the firm spends $980,000 on advertising the first year, the number of new clients expected each day will be 50. Sharpe and her associates believe this number is reasonable and are prepared to spend the $980,000 on advertising. Other pertinent information about the operation of the office follows:
The cost of office supplies has been estimated to be $50 per expected new client consultation.
It will be necessary for the firm to purchase malpractice insurance, which is expected to cost $360,000 annually.
The initial investment in the office equipment will be $120,000. This equipment has an estimated useful life of four years.
The firm will charge each new client $300 for the first 180 days. However, for the remainder of the year, clients will be charged $413.98. It is not expected that there will be repeat clients during the first year of operations.
The hourly wages of the staff are projected to be $50 for the senior consultant, $40 for the assistant consultant, $30 for the office manager, and $20 for the clerk-receptionist. Fringe benefit expense will be 40 percent of the wages paid. A total of 400 hours of overtime is expected for the year; this will be divided equally between the office manager and the clerk-receptionist positions. Overtime will be paid at one-half times the regular wage.
Sharpe has located 6,000 square feet of suitable office space which rents for $56 per square foot annually. Associated expenses will be $54,000 for property insurance and $74,000 for utilities.
Required:
1. Determine how many new clients must visit the office being considered by Maxine Sharpe and her friends in order for the venture to breakeven during the first year of operations. In addition, tell Maxine what her sales in dollar value at the break-even point should be. (Cost driver – initial consultation)
2. Write a report to Maxine Sharpe discussing the following issues:
a. Your breakeven calculation.
b. Five (5) limitations of your breakeven calculation.
c. The entity’s safety margin with an explanation of the concept.
d. Due to circumstances regarding Jamaica’s discussions with the IMF, Maxine Sharpe and her friends believe the tax rate of Jamaica may increase to 40%. How many new clients should visit the venture so they can attain an after tax profit of $600,000?