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14,000 GBP720,000
16,000 GBP750,000
17,000 GBP780,000
The managing director has asked the management accountant to prepare budgets for three projected levels of activity:
17,000
18,000
19,000
(a) Prepare budgets for Corporate Consulting Services using the above budget template for the three projected levels of activity. (b) Discuss the figures prepared for part (a). Solution
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Hours Sales Consultants Travel and subsistence Office expenses Profit / loss
GBP30,000
GBP100,000
GBP120,000
Sales: 17,000: 17,000 x GBP100 = GBP1,700,000 18,000: 18,000 x GBP100 = GBP1,800,000 19,000: 18,000 x GBP100 + 1,000 x GBP100 x 1.1 (10% premium) = GBP1,910,000.
Consultants: 17,000: 12 x GBP60,000 = GBP720,000 Note: the consultants are paid their full salary since the 12 consultants have been employed to provide up to maximum of 18,000 hours per annum 18,000: 12 x GBP60,000 = GBP720,000 19,000: 12 x GBP60,000 + 1,000 x GBP60 = GBP780,000.
Travel and subsistence: 17,000: 17,000 x GBP10 = GBP170,000 18,000: 18,000 x GBP10 = GBP180,000 19,000: 19,000 x GBP10 = GBP190,000.
Office expenses: Variable costs: (GBP780,000 - GBP720,000) / (17,000 14,000) = GBP20 per hour Fixed costs: GBP720,000 (14,000 x GBP20) = GBP440,000; or, GBP780,000 (17,000 x GBP20) = GBP440,000 17,000: GBP440,000 + 17,000 x GBP20 = GBP780,000 18,000: GBP440,000 + 18,000 x GBP20 = GBP800,000
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This example demonstrates the non-linear relationship between profits and activity. The profits at a projected demand of 17,000 are depressed by the companys current contractual arrangements with its consultants, so the consultants are paid their full salary even although they are working less than 1,500 hours. Perhaps the company should consider revising its current contractual arrangements? The GBP10 (GBP110 - GBP100) premium charged to clients when consultancy hours exceed 18,000 hours does not cover the additional hourly cost of employing freelance consultants (GBP20 ie GBP60 - GBP60,000 / 1,500). Should the company seek to obtain a higher premium for this additional work? Could the company offer this additional work to its existing consultants at a lower rate than GBP60 per hour? Is it reasonable to assume that the same average travel and subsistence rate will apply to freelance consultants? The budget figures assume that fixed and variable costs remain constant over a wide range of activity. Is this assumption reliable? Perhaps more analysis is required to obtain more reliable figures for office expenses? Note: There is no single solution to a discursive question. Other reasonable points are acceptable.
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