A state government agency contracted with FlyRite Helicopters to provide helicopter services on a requirements contract. After six months, FlyRite discovered that the agency's original estimates of the number of flying hours needed were grossly over- stated. FlyRite Helicopters is now making a claim against the state agency for defec- tive specifications. The state has been advised by its legal advisers that its chances in court on this claim would not be strong, and, therefore, an out-of-court settlement is in order. As a result of the legal advice, the state agency has hired a local CPA firm to analyze the claim and prepare a recommendation for an equitable settlement.
The particulars on which the original bid was based follow. The contract was for three different types of helicopters and had a duration of one year. Thus, the data reflect the original annual expectations. Also, the costs and activity pertain only to the contract.
|
Aircraft Type
|
Hughes
|
206B
|
206L-1
|
|
|
500D
|
Jet Ranger
|
Long Ranger
|
| Flying hours |
1,200 |
1,600 |
900 |
| Direct costs: Fixed: |
|
|
|
|
Insurance
|
$32,245
|
$28,200
|
$55,870
|
|
Lease payments
|
31,000
|
36,000
|
90,000
|
|
Pilot salaries
|
30,000
|
30,000
|
30,000
|
|
Fuel
|
$24,648
|
$30,336
|
$22,752
|
|
Minor servicing
|
6,000
|
8,000
|
4,500
|
|
Lease
|
-
|
-
|
72,000
|
Variable:
In addition to the direct costs, the following indirect costs were expected:
|
|
Fixed Costs
|
Variable Costs
|
|
Maintenance
|
$ 26,000
|
$246,667
|
|
Hangar rent
|
18,000
|
-
|
|
General administrative
|
110,000
|
-
|
Maintenance and general administrative costs are allocated to each helicopter on the basis of flying hours; hangar rent is allocated on the basis of the number of heli- copters. The company has one of each type of aircraft.
During the first six months of the contract, the actual flying hours were as follows:
| Aircraft Type |
Flying Hours |
|
500D
|
299
|
|
206B
|
160
|
|
206L-1
|
204
|
The state agency's revised projection of total flying hours for the year is given below.
| Aircraft Type |
Flying Hours |
|
500D
|
450
|
|
206B
|
600
|
|
206L-1
|
800
|
Required
1. Assume that FlyRite won the contract with a bid of cost plus 15 percent, where cost refers to cost per flying hour. Compute the original bid price per flying hour for each type of helicopter. Next, compute the original expected profit of the contract.
2. Compute the profit (or loss) earned by FlyRite for the first six months of activity. Assume that the planned costs were equal to the actual costs. Also, assume that 50 percent of the fixed costs for the year have been incurred. Compute the profit that FlyRite should have earned during the first six months, assuming that 50 percent of the hours originally projected (for each aircraft type) had been flown.
3. Compute the profit (or loss) that the contract would provide FlyRite assuming the original price per flying hour and using the state agency's revised projection of hours needed.
4. Assume that the state has agreed to pay what is necessary so that FlyRite receives the profit originally expected in the contract. This will be accomplished by revising the price paid per flying hour based on the revised estimates of flying hours. What is the new price per flying hour?