10.1 [5 points). Explain to the consultant and the CFO why client profitability in the one-two-three plan worsens in 2020. 10.2 [10 points). One issue that concerns our CFO is that our web designers have a lot of free time between client assignments. Compute the costs of web designers' excess capacity in 2019 and in 2020. 11. ECSR Legal Solutions provides legal services to large global firms. The company's controller attended an executive education seminar on internal reporting in January 2020. After the controller returned, she called a meeting of the top management team to convince them to enhance the company's internal reporting: We make so many decisions uninformed or misinformed about our company's economic reality. We price services; we bid on client requests; we evaluate performance of legal and other staff; we try to improve current client profitability; we determine the right level of service to clients, etc; etc. No surprise our income is so low. If we want to make good decisions, we must have good information. I also heard about "volume bias at the seminar; I think that's an issue for us. The company's CFO, responsible for internal reporting, agreed: "One thing in particular that has bothered me over the years is that some of our clients are incredibly needy; they demand services and hand-holding for which they do not expect to pay. Other clients buy our services, and they don't bother us at all. Yet we do not differentiate between easy and needy clients. Let's develop the new system. The CFO and the controller led the new system development efforts. The company decided to put in place an activity-based-costing (ABC) system and to extend it to client-profitability analysis. The ABC system would follow all of the ABC best practices we discussed in class (it would not, however, incorporate practical capacity). For 2020, the new system would be used in parallel to the old traditional normal absorption costing system, which allocated indirect costs to client engagements using revenues as the allocation base. Below are ECSRs estimated 2020 income statement and a sample engagement profitability report using the traditional system. ECSR Legal Solutions, 2020 Estimated Income ABC Corp Engagement 2020-02 Revenues $18,690,000 Costs: Legal professionals $7,460,000 Other professionals 2,990,000 Office rents 2,340,000 Information technology 1,860,000 Other costs 3,660,000 18,310,000 Net operating income $380,000 Engagement revenue $640,000 Engagement costs: Attributable professionals $220,000 Other attributable 48,000 Allocation of indirect costs 364,800 632,800 Engagement income $7,200 Note: Most of the Legal Professionals costs are directly attributed to individual client engagements; most of the other costs are indirect. To implement the ABC system, ECSR divided indirect costs into 12 activity cost pools, and selected activity allocation bases for each of the activity pools. ECSR was careful to incorporate the four-level hierarchy of costs into their ABC system; the split of estimated 2020 indirect costs into the four-level hierarchy is below: Unit-level activities $3,460,000 Batch-level activities $2,990,000 Product-level activities $2,640,000 Facility-level (sustaining) activities $1,563,300 The ABC system was extended to customer-profitability analysis. Below is the Whale Chart prepared using estimated 2020 data: Customers, from best to worst 11.1 (10 points). What is the value A on the vertical axis of the whale chart? Provide the exact amount in dollars and an explanation. 11.2 15 points). The controller mentioned the volume bias in her report from the executive education seminar. Explain how the volume bias affects ECSR's traditional reporting system? What are the consequences of for ECSR, since it is selling services, not products? 10 10.1 [5 points). Explain to the consultant and the CFO why client profitability in the one-two-three plan worsens in 2020. 10.2 [10 points). One issue that concerns our CFO is that our web designers have a lot of free time between client assignments. Compute the costs of web designers' excess capacity in 2019 and in 2020. 11. ECSR Legal Solutions provides legal services to large global firms. The company's controller attended an executive education seminar on internal reporting in January 2020. After the controller returned, she called a meeting of the top management team to convince them to enhance the company's internal reporting: We make so many decisions uninformed or misinformed about our company's economic reality. We price services; we bid on client requests; we evaluate performance of legal and other staff; we try to improve current client profitability; we determine the right level of service to clients, etc; etc. No surprise our income is so low. If we want to make good decisions, we must have good information. I also heard about "volume bias at the seminar; I think that's an issue for us. The company's CFO, responsible for internal reporting, agreed: "One thing in particular that has bothered me over the years is that some of our clients are incredibly needy; they demand services and hand-holding for which they do not expect to pay. Other clients buy our services, and they don't bother us at all. Yet we do not differentiate between easy and needy clients. Let's develop the new system. The CFO and the controller led the new system development efforts. The company decided to put in place an activity-based-costing (ABC) system and to extend it to client-profitability analysis. The ABC system would follow all of the ABC best practices we discussed in class (it would not, however, incorporate practical capacity). For 2020, the new system would be used in parallel to the old traditional normal absorption costing system, which allocated indirect costs to client engagements using revenues as the allocation base. Below are ECSRs estimated 2020 income statement and a sample engagement profitability report using the traditional system. ECSR Legal Solutions, 2020 Estimated Income ABC Corp Engagement 2020-02 Revenues $18,690,000 Costs: Legal professionals $7,460,000 Other professionals 2,990,000 Office rents 2,340,000 Information technology 1,860,000 Other costs 3,660,000 18,310,000 Net operating income $380,000 Engagement revenue $640,000 Engagement costs: Attributable professionals $220,000 Other attributable 48,000 Allocation of indirect costs 364,800 632,800 Engagement income $7,200 Note: Most of the Legal Professionals costs are directly attributed to individual client engagements; most of the other costs are indirect. To implement the ABC system, ECSR divided indirect costs into 12 activity cost pools, and selected activity allocation bases for each of the activity pools. ECSR was careful to incorporate the four-level hierarchy of costs into their ABC system; the split of estimated 2020 indirect costs into the four-level hierarchy is below: Unit-level activities $3,460,000 Batch-level activities $2,990,000 Product-level activities $2,640,000 Facility-level (sustaining) activities $1,563,300 The ABC system was extended to customer-profitability analysis. Below is the Whale Chart prepared using estimated 2020 data: Customers, from best to worst 11.1 (10 points). What is the value A on the vertical axis of the whale chart? Provide the exact amount in dollars and an explanation. 11.2 15 points). The controller mentioned the volume bias in her report from the executive education seminar. Explain how the volume bias affects ECSR's traditional reporting system? What are the consequences of for ECSR, since it is selling services, not products? 10