Your client is planning to open her own architectural firm for the reasons discussed above. One of her concerns is the amount of time that she will have available to work in the business. She is planning to arrange her schedule so that she can avoid before and after school care for the children, which will not only reduce family expenses, but will also reduce family stress and improve the quality of their family time. It will be a challenge, but she hopes to be able to bill enough hours to earn at least $30,000 per year after expenses. She definitely does not want to lose money, although she knowns that the first year might very well be a break-even year.
Revenue is earned by billing clients based on the number of hours worked on projects. There is time that has to be spend each year on continuing education, business development, networking events, answering short questions for clients, and taking care of the business matters such as paying bills, phone calls, learning software, office equipment, and billing clients. Also, for each job, there is a certain amount of time that is spent in preliminary talks and general discussion before any billable time is earned.
Emily estimated that she will need to spend 16 hours each month on business development and networking, 40 hours per year on continuing education, and 16 hours each month on general business needs. In addition, she finds that she has to work approcimately 1.25 hours actual time for each hour that she can bill and collect. She will bill her time at a rate of $95 per hour.
Costs are expected as follows:
Rent on the office will be $425 per month ($5,100 per year)
Software is purchased on an annual licensing basis and will cost $2,475 per year
Insurance will cost $915 per year for general and workers comp coverage plus $1,495 per year for professional liability coverage
Purchases of office equipment are expected to be $1,400 per year
Telephone and internet fees are not expected to vary significantly with volume and will run $165 per month ($1,980 per year)
On some jobs it is necessary to use outside experts for engineering, technical, or surveying jobs. These costs average 15% of revenue overall.
Supplies for jobs are expected to be 1.75% of revenue
General supplies will be $105 per month ($1,260 per year)
Research publications, continuing education, dues, and professional licenses will run $1,800 per year
Bank fees will be 0.75% of sales
Question 1: Identify which costs are fixed costs and which costs are variable costs.
Question 2: Prepare a break-even analysis to calculate the number of billable hours that have to be achieved and the total revenue as that volume to: a.) break even and b.) earn an operating profit of $30,000 per year. Also, Emily wants to know how many total hours she will have to devote to the business to achieve these levels of billable hours.