CVP Case
Paper instructions:
Discipline of Managerial Accounting (Cost Accounting) and requires some knowledge of the subject).
This case is an assignment from a client to help make a decision regarding an occupational choice. This case will be worth 100 points.
Your client, Emily C–, has asked you to provide her with an analysis about a career change that she is contemplating. Emily is in her 30’s, married, and has two younger children. She and her husband both have relatively successful careers, but are feeling disconnected from values in their lives. Emily is an architect with a large firm in the city, and her husband is an MD in a mid-sized group practice. They are happy with their occupational choices, but feel that they have made difficult family sacrifices due to career demands and pressures.
Emily is considering resigning her position and opening her own office as a practicing architect. She is licensed and knows builders in the area who would be interested in using a local architect for their projects. She has done some research as to costs and likely working and billable hours.
Required.
Prepare a written report to Emily (your client) that will help her to decide whether or not to start this business using the information as discussed in the Background Information,
Be sure to cover the following points:
1. (10 points) Identify which costs are fixed costs and which costs are variable costs.
2. (40 points) Prepare a break-even analysis to calculate the number of billable hours that have to be achieved and the total revenue at 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. (See comments below.)
3. (10 points) Prepare a cost-volume-profit graph. Be sure to label the lines, the axis, and the break-even point. This should be presented on a separate page in your report, rather than in the body of the report for easier reference.
4. (20 points) Emily feels that her billing rate of $95 per hour may not hold in the current market. Re-run the calculations in part 2 above using a billing rate of $70 per hour. (A new graph is not required.)
5. (20 points) Prepare a summary explaining your findings. Be sure to explain the difference between fixed and variable costs, explain what the break-even point represents and why it is important, what the contribution margin is, and address any other points that you feel are important from a managerial accounting perspective. Overall report quality is worth 10 of these points.
* While this is not a class in composition, written communication in business is important. Your report should be well organized; it should be free from grammatical and spelling errors; and it should be concise and to the point so that the reader can clearly see your recommendations and ideas without having to dig through the body of the text. If there are spelling errors that are identified by your word processing software, you absolutely need to correct them before you submit the report for your client.
Length is not important, but you need to be sure that you address each of the points above.
Remember that you are presenting this report to your client. It should look and read well. Therefore, the report should be typed and a cover page will give it a professional appearance. Look at the print preview to see how your report will look when printed. Check for appropriate page breaks, alignment, and general appearance.
Grading is based on accuracy of calculations and on the quality of the report.
Background Information.
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 her 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 knows that the first year might very well be a break-even year.
Basic Business Model.
Following are some data about the basic business:
Revenue is earned by billing clients based on the number of hours worked on projects. There is time that has to be spent each year on continuing education, business development, networking events, answering short questions from 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 approximately 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 to be as follows:
• Rent on the office will be $625 per month
• Software is purchased on an annual licensing basis (to keep current with upgrades and standards) and will cost $2,475 per year
• Insurance will cost $915 per year for general and workers comp coverage plus $1,695 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 $145 per month
• On some jobs it is necessary to use outside experts for engineering, technical, or surveying work. These costs average 15% of revenue overall.
• Supplies for jobs are expected to be 2.25% of revenue (prints, report covers, etc)
• General supplies (office supplies, coffee, etc) will be $105 per month
• Research publications, continuing education, dues, and professional licenses will run $1,800 per year
• Bank fees for check and credit card processing will be 1.05% of sales
• Note that some of these costs are shown per month and some are shown per year.
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