Kobe Company is a management consulting company. The company employs $20$

consultants. Because of surplus consulting capacity, the company is considering whether to

start a new section to provide consulting services to universities. The new section will be staffed

by two consultants, who are presently each paid $$70,000$ per year. If the section is not created,

the company will ask the two consultants to retire.

o The company will assign a senior secretary $($who is paid $$24,000$ per year$)$ to the new section to help

with the administrative work. The senior secretary will be replaced in his previous job by a new

secretary at a salary of $$20,000.$

o The company has only one office, rented at a cost of $$80,000$ per year. The new section will occupy

about $10$ percent of the space in this office.

o The office furniture is rented. Rental cost for the furniture and equipment used by the section is

$$1,000$ per year.

o The company has already sent the two consultants for a training course to learn about university

management at a cost of $$10,000.$

o The section$\text{'}$s share of allocated corporate costs, such as the chief executive's salary, will be

$$20,000.$

o The new section will generate revenues of $$400,000$ per year. Variable costs will amount to $40$

percent of revenues.

Required

$1.$ Considering only the incremental revenues and costs, should the company start the new

section? Show calculations.

$2.$ If the expected revenues are only $$300,000$ should the company start the new section?

Show calculations.