ACCT213 – Fall 2013

Project #3
Written by: Tim Bergsma, CMA, CFE

Background
ABC Consulting, LLC is a consulting company that offers three primary services. Those services include “Business
Planning”, “Compliance Services” and “Continuous Improvement Services”. The company currently employs 32
people. The company was founded in 1991. Their fiscal calendar is on a calendar year basis (January – December).

Below is a table showing some basic information for ABC for the year ended 2010:

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# of Cl ients (2010) 110 250 300
Avg. Revenue per Cli ent $7,000 $2,500 $6,500
Direct Costs
Sal aries
# of People (2010) 5 8 16 3
Average Annual Sala ry 85,000 65,000 100,000 $125,000.00
Divis ion Speci fi c Depreciati on
Total Cos t of Depreciabl e As s ets $15,000.00 $20,000.00 $20,000.00 $100,000.00
Sal vage Value $1,000 $1,000 $1,000 $2,500.00
Life of As s ets (in years ) 3 3 3 5
Supplies Expense
# of Cl ients 110 250 300
Supplies a llowance per Client $100 $125 $200
Other Mis c. Expens es $10,000 $12,000 $12,500 $12,500.00

Other Indirect Costs Non-Division Specific

Rent $18,000.00
Taxes $22,764.20
Utilities $6,000.00
Additionally, below is a table showing some prior year data.

Year # of Clients # of Employees Total Costs

2000 150 14 $1,880,561.15
2001 285 17 $2,044,088.21
2002 300 18 $2,151,671.80
2003 420 20 $2,390,746.44
2004 425 20 $2,570,695.10
2005 450 20 $2,764,188.28
2006 450 23 $2,909,671.88
2007 550 25 $3,062,812.50
2008 605 28 $3,093,750.00
2009 650 31 $3,125,000.00

Using the data above, which I’ve also provided electronically in Excel, please do the following:

1. Conduct a regression analysis on the prior year data. What independent variable (clients or employees) is
a better predictor of total company cost? Explain your answer. Include in your answer the regression
output.
2. Based on your answer to question #1, and again using data from your regression output, estimate the
variable cost per activity and total fixed costs for ABC Consulting. Use the 2010 actual results to
determine your quantity of the variable activity (i.e. clients or employees). If you suggest that “clients”
are a better fit, you will use 660 clients. If you feel “employees” area a better fit, you will use 32
employees.
3. Now that you have estimates for variable costs and fixed costs, build a contribution formatted Income
Statement in good form. Build this Income Statement based on either 660 clients, or 32 employees
(depending on what you decided in question #1). Build this Income Statement so that there is a column
for Annual Totals, a column for Per Unit values, and also a column showing variable cost and contribution
margin as a percent of sales. See the example below. Note the numbers below are just for example
purposes and don’t reflect data from your project:

ABC Consulting, LLC

Income Statement
For year ended Dec. 31, 2010

1,000
Per Unit
Sales $1,000,000.00 $1,000.00
Variable Costs $750,000.00 $750.00 75%
Contribution Margin $250,000.00 $250.00 25%
Fixed Costs $200,000.00 $200.00
Operating Income $50,000.00 $50.00
Tax (rate is 30%) $15,000.00
Net Income $35,000.00
4. Based upon the Income Statement you created in question #3, and this additional information, answer
the following questions:

Additional Information:
 Assume a tax rate of 30%
 Assume that management desires a $250,000 Net Income (after taxes)

Answer the following:

a. Breakeven point in units

b. Breakeven point in sales dollars
c. Targeted point in units
d. Targeted point sales dollars
e. Margin of safety in sales dollars
f. Margin of safety ratio

5. Now assume that management is considering adding a fourth division to the company. Following are the
assumptions from management:
a. Name of the proposed division is “Bookkeeping & Payroll”
b. Average revenue per client would be $4,200 per year, and it is estimated that there would be 35
clients in the first year
c. 1 full-time and 1 part-time (half time) employee would be added to work directly in this new
division
d. The combined annual salary for the new staff added would be $90,000.
e. It is estimated that $42,000 in addition “indirect” charges would be added to the company
f. The new division would add $5,000 in new depreciable equipment. This new equipment would
have a $500 salvage value and have a useful life of three years
g. Annual supplies for this new division are estimated be $3,500
h. Annual Other Misc. Expenses for this new division are estimated to be $8,000

Conduct a differential analysis and make a recommendation to management on whether or not you think
the new division should be added. Support your recommendation with the data from your differential
analysis. Also consider what kinds of non-financial factors should be considered. As a part of your answer
show your analysis.

6. Build a budgeted Income Statement for 2011. Again, use the “Contribution” format. Make the following
assumptions:
a. Total number of clients is 765, and the weighted average revenue per client is 2% higher than it
was for 2010.
b. Use the same variable cost per unit of activity that you calculated in question #2.
c. Assume $100,000 more in fixed costs than your regression output from #2 estimated.

7. Assume that the following data represents actual results for 2011. Using a format similar to the one
following below, put together the “Flexible Budget Variances” and “Sales Activity Variances”.
Example of Format:

a. Actual number of clients was 750, and the weighted average revenue per client was $5,000.
b. Actual variable cost per client was $2,700.
c. Actual fixed costs were $1,300,000.
Instructions

1. Answer the questions as required within the project above.

2. Your answers need to be in the form of a report
3. You should submit one Word document (report) for this project.
4. You should include all necessary tables, charts, graphics, etc., in your Word document. Professionalism
and clear communication is important.
5. You should submit via Blackboard your Excel working papers. But, keep in mind that I need to be able
read your Word document (report) without needing to read the Excel file. I’ll use the Excel file to prove
out calculations if needed.
6. Your report needs to be double-spaced.
7. Your report needs a cover page. Use the APA sixth edition formatting for your cover page.
8. You need to hand in a hardcopy of your report in class (Word document only).
9. You need to submit both your Word documents and Excel files to Blackboard electronically.
10. Use the following naming convention for the files you upload. Last name_first initial_case3.doc. Naturally
you’ll use the appropriate file suffix (.doc, .xls) depending of the software you are using.

Due Date

 Tuesday, December 17, 2013 at 10:00AM

o Remember, you need to hand in a hardcopy at class. You also need to submit all documents
electronically via Blackboard.

Grading

LATE POLICY:
All assignments are expected to be completed by the assigned due date. Late submissions will result in the
following: There is a 20% reduction for being one day late (24 hours), and then there is an additional 10%
reduction for each additional day the project is late. The project will receive zero credit if it is more than three
days late.