Question
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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