Differential cost analysis in a service organization (contributed by Robert H. Colson).

Kayto Search, LLP, is a "head-hunting" firm that provides information about candidates for executive and cabinet-level positions. Major customers include corporations and the federal government.

The cost per billable hour of service at the company's normal volume of 5,000 billable hours per month follows. (A billable hour is one hour billed to a client.)

Treat each question independently. Unless given otherwise, the regular fee per hour is $600.

a. How many hours must the firm bill per month to break even?

b. Market research estimates that a fee increase to $700 per hour would decrease monthly volume to 4,000 hours. The accounting department estimates that fixed costs would be $1,000,000 while variable costs per hour would remain unchanged.
How would a fee increase affect profits?

c. Kayto Search is operating at its normal volume. It has received a special request from a cabinet official to provide investigative services on a special-order basis.
Because of the long-term nature of the contract (4 months) and the magnitude (1,000 hours per month), the customer believes a fee reduction is in order. Kayto Search has a capacity limitation of 6,000 hours per month. Fixed costs will not change if the firm accepts the special order. What is the lowest fee Kayto Search would be willing to charge?

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KAYTO SEARCH, INC. Cost per Billable Hour of Service Average Cost per Hour Billed to Client: Variable Labor-Consultants.... $200 Variable Overhead, Including Supplies and Clerical Support. 40 Fixed Overhead. Including Allowance for Unbilled Hours 160 $400 Marketing and Administrative Costs per Billable Hour (all fixed) 100 Total Hourly Cost... $500