Question 1. Newbury Consulting is a software design firm. Budgeted costs and target sales of running the firm for the year ended 31st December 2016 are: M Professional labour fixed salaries (billable hours 2,000,000) 200 Support costs 144 Target profit 156 Total target sales 500 The current method of billing clients is to trace professional labour cost to each client and in order to cover support costs and provide target profit to charge 250% o professional labour cost. The 144M support costs shown above have been analyzed as follows: Budgeted use of M Cost driver resource Technicians salaries & costs (fixed costs) 30 Technicians hours 1,200,000 hours Computer running (fixed costs) 20 Computer hours 4,000,000 hours 500,000,000 Photocopying (pages) Photocopying (variable cost) 10 pages Total identifiable support costs 60 Unidentifiable support costs(fixed cost) 84 Total support costs 144 The firm's data-processing can trace these costs to individual jobs. In order to charge clients more fairly for the resources used on each contract, it has been decided to review the effects on clients' bills of the following method of charging: 178% of professional labour cost + Identifiable support costs + Unidentifiable support costs (140% of identifiable support costs) The firm completes many contracts each year. Estimates of resource cost or usage have just been completed for the following two jobs: Client AB 100 Client CD300 Professional labour 350,000 350,000 Technical specialists' costs 1,500 hours 8,000 hours Computer time 4,000 hours 24,000 hours Photocopying 40,000 sheets 65,000 sheets Required: a) Calculate the contract fees which would be charged to Client AB 100 and Client CD300 under each of the two bases of charging described above. (7 marks) b) Compare the answers in a) above and briefly discuss the advantages and limitations of the two methods. (3 marks) c) Calculate the profit which will be made by the company for the year ended 31st December 2016 using each of the two methods, if actual costs are the same as estimated but resource use is as follows: Professional labour 2,000,000 billed hours Technicians hours 1,000,000 hours Computer time 4,300,000 hours Photocopying 400,000,000 sheets (7 marks) d) Explain why the two methods produce different results and indicate whether this would change your recommendation on which billing method to use