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McCarty Associates is a construction engineering firm that prepares detailed construction drawings for single-family homes. The market for this service is very competitive. To compete

McCarty Associates is a construction engineering firm that prepares detailed construction drawings for single-family homes. The market for this service is very competitive. To compete successfully McCarty must deliver quality service at low cost. McCarty presents the following data for 2019 and 2020.

2019

2020

1.

Number of jobs billed

450

600

2.

Selling price per job

$3,700

$3,300

3.

Engineering labor-hours

27,000

30,000

4.

Cost per engineering labor-hour

$38

$39

5.

Engineering support capacity (number of jobs the firm can do)

800

800

6.

Total cost of engineering support (space rent, equipment, etc.)

$208,000

$264,000

7.

Engineering support-capacity cost per job

$260

$330

Engineering labor-hour costs are variable costs. Engineering support costs for each year depend on the engineering support capacity that McCarty chooses to maintain each year (that is, the number of jobs it can do each year). Engineering support costs do not vary with the actual number of jobs done in a year.

Requirements:

1. Calculate the operating income of McCarty Associates in 2019 and 2020.

2. Calculate the growth, price-recovery, and productivity components that explain the change in operating income from 2019 to 2020.

3. Comment on your answer in requirement 2. What do these components indicate?

Requirement 1. Calculate the operating income of

McCarty Associates in 2019 and 2020.

2019

Revenues

Costs

Engineering labor costs

Engineering support costs

Total costs

Operating income

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