Andeka
Oct 20, 2009, 09:02 AM
I have this similar question that one of the participants aked earlier. May you please help me out. Thank you.
Over the past 15 years, InfoCheck has developed a reputation for reliable service. This company develops and supports proprietary software applications. The business has grown from a one-person operation to a nine-person operation including one manager and eight skilled programmers. In recent years, however, competition has eroded business volume and profits, leading the owner, Vincent Argo, to ask his manager to take a closer look at the cost structure of the business. The manager determines that direct labor (programmers) are identified with individual jobs and shared at a prespecified rate to the customers. The salary and benefits for a senior programmer are $65,000 per year; for a junior programmer, they are $45,000 per year. Each programmer can work up to 1750 hours in a year on customer jobs, but if there are not enough jobs to keep each of them busy, the cost of their compensation still will have to be incurred. The manager's salary and benefits amount to $75,000 per year. In addition, the following fixed costs are also incurred each year:
Rent
$36,000
Insurance
$6,000
Utilities
$6,000
Supplies
$9,000
Computer Upgrades
$8,000
Computer Depreciation
$21,800
Total Costs
$86,800
There are negligible material costs and these are recovered directly from customers. The profitability of the operation depends on the volume of business and the hourly rate charged for labor. At present, InfoCheck charges $51.06 per hour for all its jobs. Vincent said he would not consider firing any of the four senior programmers because he believes it is difficult to get workers with their skills and loyalty to the firm, but he is willing to consider releasing one or two of the junior programmers.
(1) Determine the total fixed costs including personnel costs for each of the following three staffing levels:
(a) 4 senior programmers, 4 junior programmers
(b) 4 senior programmers, 3 junior programmers
(c) 4 senior programmers, 2 junior programmers
(2) What is the contribution margin per hour worked on customer jobs?
(3) Determine the minimum number of hours that must be charged to customer jobs for this company to earn an annual profit of $50,000.
(4) Determine the minimum number of hours that must be charged to customer jobs for this company to earn an annual profit equal to 10% of labor billing revenues.
(5) Business is expected to increase if one more senior programmer is hired. How much new business (in terms of hours charged to customer jobs) must be generated to justify adding a fifth senior programmer?
Note: Programmer salaries can be treated as a fixed cost since they are always paid even if the programmer doesn't work. However, for this exercise, you are expected to treat them as variable costs so that you can show contribution margin. You may want to discuss whether this is a good practice and why you would do this.
Over the past 15 years, InfoCheck has developed a reputation for reliable service. This company develops and supports proprietary software applications. The business has grown from a one-person operation to a nine-person operation including one manager and eight skilled programmers. In recent years, however, competition has eroded business volume and profits, leading the owner, Vincent Argo, to ask his manager to take a closer look at the cost structure of the business. The manager determines that direct labor (programmers) are identified with individual jobs and shared at a prespecified rate to the customers. The salary and benefits for a senior programmer are $65,000 per year; for a junior programmer, they are $45,000 per year. Each programmer can work up to 1750 hours in a year on customer jobs, but if there are not enough jobs to keep each of them busy, the cost of their compensation still will have to be incurred. The manager's salary and benefits amount to $75,000 per year. In addition, the following fixed costs are also incurred each year:
Rent
$36,000
Insurance
$6,000
Utilities
$6,000
Supplies
$9,000
Computer Upgrades
$8,000
Computer Depreciation
$21,800
Total Costs
$86,800
There are negligible material costs and these are recovered directly from customers. The profitability of the operation depends on the volume of business and the hourly rate charged for labor. At present, InfoCheck charges $51.06 per hour for all its jobs. Vincent said he would not consider firing any of the four senior programmers because he believes it is difficult to get workers with their skills and loyalty to the firm, but he is willing to consider releasing one or two of the junior programmers.
(1) Determine the total fixed costs including personnel costs for each of the following three staffing levels:
(a) 4 senior programmers, 4 junior programmers
(b) 4 senior programmers, 3 junior programmers
(c) 4 senior programmers, 2 junior programmers
(2) What is the contribution margin per hour worked on customer jobs?
(3) Determine the minimum number of hours that must be charged to customer jobs for this company to earn an annual profit of $50,000.
(4) Determine the minimum number of hours that must be charged to customer jobs for this company to earn an annual profit equal to 10% of labor billing revenues.
(5) Business is expected to increase if one more senior programmer is hired. How much new business (in terms of hours charged to customer jobs) must be generated to justify adding a fifth senior programmer?
Note: Programmer salaries can be treated as a fixed cost since they are always paid even if the programmer doesn't work. However, for this exercise, you are expected to treat them as variable costs so that you can show contribution margin. You may want to discuss whether this is a good practice and why you would do this.