Counters and Green, CPAs, LLP had service revenues last month of $46,000, with the only variable costs consisting of 100 hours of staff labor at $130 per hour and 50 hours of partner-level labor at $200 per hour. Fixed costs are $120,000 for the year. The company anticipates a 10% increase in service revenues next month and expects its cost structure to remain consistent with last month's levels. Based on this information, which of the following statements is correct?

Question

Quizplus · Accepted Answer

The company had labor costs of $23,000 last month: (100 hours of staff labor × $130 per hour) + (50 hours of partner-level labor × $200 per hour)= $13,000 + $10,000 = $23,000. Total variable costs thus amounted to $23,000. Service revenues of $46,000 less variable costs of $23,000 resulted in acontribution margin of $23,000. Contribution margin of $23,000 less $10,000 of fixed costs per month ($120,000 per year ÷ 12 months) equaled operatingprofit of $13,000 last month. The degree of operating leverage (DOL) is equal to contribution margin of $23,000 ÷ operating income of $13,000 = 1.769. Ifsales increase by 10%, the DOL 1.769 needs to be multiplied by the 10% growth amount (1.769 x .1 = 0.1769). The next step is to add 1 to this amount (1+ 0.1769 = 1.1769). This intermediate value of 1.1769 is often referred to as the multiplier. The final step is to multiply the 1.1769 by last month's operatingincome of $13,000: 1.1769 × $13,000 = $15,299.70, which rounds to $15,300. Therefore, $15,300, as rounded, will be the anticipated operating incomenext month.

Counters and Green, CPAs, LLP Had Service Revenues Last Month