(Revising and analyzing an operating budget) Lopez Agency, a division of Chalmette Industries (Cl), offers consulting services to clients for a fee. Cl's corporate management is pleased with the performance of Lopez Agency for the first nine months of the current year and has recommended that Lopez’s division manager, Sara Kross, submit a revised forecast for the remaining quarter because the division has exceeded the annual year-to-date plan by 20 percent of operating income. An unexpected increase in billed hour vol¬ ume over the original plan is the main reason for this gain in income. The original operating budget for the first three quarters for Lopez Agency follows.

When comparing the actuals for the first three quarters to the original plan, Kross analyzed the variances and will reflect the following information in her revised forecast for the fourth quarter.
The division currently has 25 consultants on staff, 10 for management consulting and 15 for EDP consulting, and has hired 3 additional manage¬ ment consultants to start work at the beginning of the fourth quarter to meet the increased client demand.
The hourly billing rates for consulting revenues will remain at $90 for each management consultant and $75 for each EDP consultant. However, due to the favorable increase in billing hour volume when compared to the plan, the hours for each consultant will be increased by 50 hours per quar¬ ter. New employees are equally as capable as current employees and will be billed at the same rates.
The annual budgeted salaries and actual salaries, paid monthly, are $50,000 for a management consultant and 8 percent less for an EDP consul¬ tant. Corporate management has approved a merit increase of 10 percent at the beginning of the fourth quarter for all 25 existing consultants, but the new consultants will be compensated at the planned rate.
The planned salary expense includes a provision for employee fringe benefits amounting to 30 percent of the annual salaries; however, the im¬ provement of some corporatewide employee programs will increase the fringe benefit allocation to 40 percent.
The original plan assumes a fixed hourly rate for travel and other re¬ lated expenses for each billing hour of consulting. These expenses are not reimbursed by the client, and the previously determined hourly rate has proven to be adequate to cover these costs.
Other revenues are derived from temporaiy rentals and interest income and remain unchanged for the fourth quarter.
Administrative expenses have been favorable at 7 percent below the plan; this 7 percent savings on fourth-quarter expenses will be reflected in the revised plan.
Depreciation for office equipment and computers will stay constant at the projected straight-line rate.
Due to the favorable experience for the first three quarters and the divi¬ sion's increased ability to absorb costs, Cl corporate management has in¬ creased the corporate expense allocation by 50 percent.

a. Prepare a revised operating budget for the fourth quarter for Lopez Agency that Sara Kross will present to Chalmette Industries. Be sure to furnish supporting calculations for all revised revenue and expense amounts.

b. Discuss the reasons that an organization would prepare a revised fore¬ cast.

c. Discuss your feelings about the 50 percent increase in corporate ex¬ pense allocations.

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2006 OPERATING BUDGET 1st Quarter 2nd Quarter 3rd Quarter Total 9 Months Consulting fees Management consulting EDP consulting Total Other revenue Total $315,000 421,875 $ 736,875 10,000 $ 746,875 Expenses Consultant salaries Travel and entertainment Administrative Depreciation Corporate allocation Total Operating income $315,000 421,875 $ 736,875 $315,000 421,875 $ 736,875 10,000 $746,875 10,000 $ 746,875 $(386,750) $(386,750) $(386,750) $ 945,000 1,265,625 $ 2,210,625 30,000 $ 2,240,625 $(1,160,250) (45,625) (45,625) (45,625) (136,875) (100,000) (100,000) (100,000) (300,000) (40,000) (40,000) (40,000) (120,000) (50,000) (50,000) $(622,375) $(622,375) $ 124,500 $ 124,500 $ 124,500 (50,000) $(622,375) (150,000) $(1,867,125) $ 373,500