Counters and Black, CPAs, LLP had service revenues last month of $70,000. Their variable labor costs consisted of 100 hours of partner-level labor at $150 per hour and 400 hours of staff labor at $50 per hour. Other variable costs were $2,000 for the month, and fixed costs are $336,000 on an annual basis. The firm anticipates a 10% increase in service revenues next month and expects that its cost structure will 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 $35,000 last month: (100 hours of partner-level labor × $150 per hour) + (400 hours of staff labor × $50 per hour)= $15,000 + $20,000 = $35,000. There was an additional variable cost component of $2,000. Therefore, total variable costs were $37,000 for the month.Service revenues of $70,000 less variable costs of $37,000 results in a contribution margin of $33,000. Contribution margin of $33,000 F1F1F1S1?F1F1F10 $28,000 of fixedcosts per month ($336,000 per year ÷ 12 months) is equal to operating profit of $5,000 last month. The degree of operating leverage (DOL) is equal tocontribution margin of $33,000 ÷ operating income of $5,000 = 6.6. If service revenues increase by 10% next month, this results in a multiplier of 6.6 × 0.1 =0.66. Adding 1 to this factor and multiplying 1.66 by the $5,000 of operating profit last month will result in anticipated operating profit of $8,300 next month.

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