After working for a software company for several years, Chris and Terry quit their jobs and set up their own consulting firm called C & T Software, Inc. Major customers include corporate, professional, and government organizations that are setting up information networks.
Average cost per hour billed to client:
Variable labor-consultants
$50
Variable overhead, including supplies and clerical support
20
Fixed overhead, including allowance for unbilled hours
80
$150
Marketing and administrative costs per billable hour (all fixed)
40
Total hourly cost
$190
Treat each of the following questions independently. Unless given otherwise, the regular fee per hour is $200.
The cost per billable hour of service at the company's normal volume of 3,000 billable hours per month follows. (A billable hour is one hour billed to a client.)
a. How many hours must the firm bill per month to break even? (You may need to refer to Chapter 5 to answer this question.)
b. Market research estimates that a fee increase to $250 per hour would decrease monthly volume to 2,000 hours. The accounting department estimates that fixed overhead costs would be $120 per hour, while variable cost per hour would remain unchanged. What effect would a fee increase have on profits?
c. Assume C & T Software is operating at its normal volume of 3,000 hours per month. It has received a special request from one of its long-time customers to provide services on a special-order basis. Because of the long-term nature of the contract (four months) and the magnitude (1,000 hours per month), the customer believes a fee reduction is in order. C & T Software has a capacity limitation of 4,000 hours per month. Fixed costs would not change if the firm accepts the special order. What is the lowest fee C & T Software would be willing to charge?