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The following information applies to the questions displayed below.] B-You is a consulting firm that works with managers to improve their interpersonal skills. Recently, a representative of a high-tech research firm approached B-You's owner with an offer to contract for one year with B-You to improve the interpersonal skills of a newly hired manager. B-You reported the following costs and revenues during the past year.
1 2 3 4 Sales revenue Costs Total costs Operating profit (loss) Labor Equipment lease Rent Supplies Officers’ salaries Other costs 5 6 7 8 9 10 11 12 13 14 A B C B-YOU 171,000 25,200 21,600 105,000 16,200 11,400 $ 360,000 $ 350,400 $ 9,600 Annual Income Statement If B-You decides to take the contract to help the manager, it will hire a full-time consultant at $85,000. Equipment lease will increase by 5 percent. Supplies will increase by an estimated 10 percent and other costs by 15 percent. The existing building has space for the new consultant. No new offi ces will be necessary for this work. Required a. What are the differential costs that would be incurred as a result of taking the contract? b. If the contract will pay $90,000, should B-You accept it? c. What considerations, other than costs, are necessary before making this decision?
Answer :
a.)
Consultant labor | $85,000 |
Equipment lease | $1,260 (25,200*5%) |
Supplies | $10,500 (105,000*10%) |
Other costs | $1,170 (11,400*15%) |
Total differential costs | $97,930 |
b.)
No.
Since acceptance of the contract would result in a decrease of operating profits by $7,930(= $90,000 paid according to the contract - $97,930 in differential costs), it would seem that the contract should be rejected. Of course, as a practical matter the amount is so small that differential profit probably would not be the deciding factor. Errors in estimation alone could change the decision easily.
c.)
1.Whether the contract will provide for more revenues in the future.
2. Whether this will enable the company to get into a new, profitable line of business.
3. What other opportunities the company has for expanding.