Proportional Performance Method
Response to the following problem:
The Hilt Company, a public relations company, signs two-year contracts with its clients. For $80,000 in advance, the company agrees to ensure that the client's name is mentioned five times on a network national news program, 10 times in a national news magazine, and 15 times on a local news program. In 2010 the company signed eight contracts; no additional contracts were signed in 2011.
In 2010 the company's clients were mentioned 10 times on network national news programs, 40 times in national news magazines, and 22 times on local news programs. In 2011 the company's clients were mentioned 30 times on national news programs, 40 times in national news magazines, and 98 times on local news programs. The relevant cost information for the eight contracts is as follows:
Initial direct costs $ 20,000
Annual indirect costs 80,000
Estimated (and actual) total direct costs for two-year period 260,000
Direct cost per
National news program 2,000
National news magazine 1,500
Local news program 500
Required
1. Prepare the income statements for 2010 and 2011.
2. From a theoretical viewpoint, how should the company compute the depreciation of its office building and office equipment that would be included in the preceding costs? Why?