Acc202 Survey of Accounting: P15-20 Luke Chou, the president of Digitech Computer Services

Acc202 Survey of Accounting

Problem 15-20 Flexible Budget Planning
Luke Chou, the president of Digitech Computer Services, needs your help. He wonders about the potential effects on the firm's net income if he changes the service rate that the firm charges its customers. The following basic data pertain to fiscal year 2012.
Standard Rate & Variable Costs:
Service Rate per Hour 80.00
Labor 40.00
Overhead 7.20
General, selling & Admin 4.30
Expected Fixed Costs:
Facility Repair 525,000
General, Selling & Admin 150,000

Required
a. Prepare the pro forma income statement that would appear in the master budget if the firm expects to provide 30,000 hours of services in 2012.
b. A marketing consultant suggests to Mr. Chou that the service rate may affect the number of service hours that the firm can achieve. According to the consultant's analysis, if Digitech charges customers $75 per hour, the firm can achieve 38,000 hours of services. Prepare a flexible budget using the consultant's assumption.
c. The same consultant also suggests that if the firm raises its rate to $85 per hour, the number of service hours will decline to 25,000. Prepare a flexible budget using the new assumption.
d. Evaluate the three possible outcomes you determined in Requirements a, b, and c and recommend a pricing strategy.
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