Refer to the AccuTax Inc. exhibit One of the partners is planning to retire at the end of the year. May Higgins, the sole remaining partner, plans to add a manager at an annual salary of $92,400. She expects the manager to work, on average, 45 hours a week for 45 weeks per year. She plans to change the required staff time for each hour spent to complete a tax return to the following: Complex Individual Simple Individual Return Partner Manager Business Return 0.4 hour 0.1 hour Return 0.07 hour 0.13 hour Senior consultant Consultant 0.5 hour 0.40 hour 0.40 hour 0.2 hour 0.8 hour The manager is salaried and earns no overtime pay. Senior consultants are salaried but receive time and a half for any overtime worked. The firm plans to keep all the senior consultants and adjust the number of consultants as needed including employing part- time consultants, who also are paid on an hourly basis. Higgins has also decided to have five supporting staff at $56,500 each. All other operating data remain unchanged. The manager will share 7% of any profit over $440,000 before bonus. Required: 1. What is the budgeted total cost for overtime hours worked by senior consultants? 2. How many full-time consultants should be budgeted? 3. Determine the manager's total compensation and total pretax operating income for the firm, assuming that the revenues from preparing tax returns remain unchanged. EXHIBIT 10.18 Budgeted Operating Income with No Change in Staffing As an example, AccuTax Inc. provides tax services to small firms and individuals. It expects to have the following revenues from preparing tax returns for the year ended December 31, 2019: Tax returns for business firms Individual tax returns: Simple returns Complex returns Total revenues $1,640,000 1,200,000 $1,000,000 2,840,000 $3,840,000 The firm has 2 partners, 8 senior consultants, and 20 consultants. On average, a partner works 50 hours a week and is paid $250,000 a year. Both senior consultants and consultants are expected to work 40 hours a week and are paid, respectively. $90,000 and $60,000 a year. The annual compensation for supporting staff is $40,000 per full-time equivalent. The number of supporting staff varies with the size of the firm. In general, one supporting staff person is needed for every 2 partners, one for every 4 senior consultants, and one for every 10 consultants. After allowing for vacation, sickness, and continuing education days, the weeks per year available to work with clients are 40 weeks for each partner, 45 weeks for each senior consultant, and 48 weeks for each consultant. All partners and senior consultants are full-time professional staff members. The firm estimates the following required proportions of professional staff times for each hour spent to complete each of the three different classifi- cations of tax returns: Business Return Simple Individual Partner Senior consultant Consultant 40% 60% 10% 90% Complex Individual 10% 40% 50% General and administrative expenses are estimated as $150,000 per year, plus 10% of the total payroll. The firm charges $250 per hour for business returns, $100 per hour for individ- ual returns with complicated tax matters, and $50 per hour for simple individual tax returns. The budgeted revenues and the total hours for each of the returns for the coming year are as follows: Budgeted Revenue Business returns Individual returns: Simple returns Complex returns $1,000,000 Hourly Charge Rate $250 Required Hours 4,000 1,640,000 50 Total 1,200,000 $3,840,000 100 = 32,800 12,000 48,800 The following table shows the professional staff requirements for the budgeted revenue: Total Hours Partner Consultant Business returns 4,000 Complex Individual returns 12,000 Simple Individual returns 32,800 Total hours 48,800 Hours per week (given) Equivalent number of work weeks Weeks per year/professional staff (given) Number of professional staff members needed + Senior Consultant 1,600 1,200 2,400 4,800 3,280 2,800 10,480 50 + 40 56 40 1.4 262 45 5.8 + 6,000 29.520 35,520 40 888 48 18.5 The budget shows that AccuTax has sufficient professional staff to support the expected activity. Assuming AccuTax plans no change in personnel and maintains the same staff level. its budgeted operating income will be $808,000, as shown in Exhibit 10.18. Revenue Payroll expenses: Partners Senior consultants Consultants ACCUTAX INC. Budgeted Operating Income For the Year Ended December 31, 2019 2 x $250,000 = 8 x $ 90,000 20 x $ 60,000 5$ 40,000 General and administrative $150,000+ (10 % x $2,620,000) = Supporting staff expenses Operating Income *5=(2/2) + (8/4)+(20/10)=1+2+2 $ 500,000 720,000 1,200,000 200,000 $3,840,000 2,620,000 412,000 $ 808,000