Question
McKenny is in the process of evaluating its new client services for the business consulting division. The following shows projected data for this new service:
McKenny is in the process of evaluating its new client services for the business consulting division. The following shows projected data for this new service:
-Estate planning, a new service, will incur $100,000 in development costs and employee training in the first year.
-The direct labor costs of providing this service are estimated to be on average $27 per hour.
-Customer service expenses are estimated to be $95 per consulting job, with each job lasting 300 hours for Client Elsa and 100 hours for Client Anna. The customer-service representative treats each client as an independent job.
-Other costs for this new service are estimated at $400,000 per year, classified as fixed costs.
-The estate planning service program is expected to last for two years. Afterwards, a new law will be in place that will require new operating guidelines for estate consulting.
-The current staff expects to bill Client Elsa 30,000 hours and Client Anna 10,000 hours for each of the two years when the program is in effect. Billing for each customer will be $42 per hour.
One year later, McKenny found the actual estate planning service data to be the following:
-The development costs and employee training incurred $80,000.
-The direct labor costs averaged $28 per hour, and other fixed costs incurred $500,000.
-Customer service expenses averaged $92 per consulting job, with each job lasting 200 hours for Client Elsa and 200 hours for Client Anna.
-The staff billed Client Elsa 25,000 hours and Client Anna 25,000 hours with an average billing rate of $45 per hour.
Questions:
a) What is the estimated life-cycle operating income for the first two years the Estate planning service?
b) Calculate direct labor price variance, sales-mix revenue variance for Client Elsa, and static variance in operating income for the first-year-service.
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