Problem:
Jeffrey Washington, the president of centech computer services needs your help. He wonders about the potential effects on the firms net income if he changes the service rate that the firm charges its customers. The following basic data pertain to fiscal year 2009.
Standard Rate and variable cost
service rate per hour $83.00
labor cost 40.0
overhead cost 7.10
General, selling, and administrative cost 4.40
Expected fixed cost
Facility repair $500,000
General, selling, and administrative 130,000
A. Prepare the pro forma income statement that would appear in the master budget if the firm expects to provide 27,000 hours of service in 2009.
B. A marketing consultant suggest to Mr. Washington that the service rate may affect the number service hours that the firm can acheive. According to the consultants analysis, if centech charges customers $78 per hour, the firm can acheive 33,000 hours of services. Prepare a flexible budget using the consultant's assumption.
C. The same consultant also suggest that if the firm raises its rates to $88.00 per hour, the number of service hours will decline to 22,000. Prepare a flexible budget using the new assumption.
D. Evaluate the three possible outcomes you determined in a,b,and c and reccommend a price strategy.