Toronto Business Associates, a division of Maple Leaf Services Corporation, offers management and computer consulting services to clients throughout Canada and the northwestern United States. The division specializes in website development and other Internet applications. The corporate management at Maple Leaf Services is pleased with the performance of Toronto Business Associates for the first nine months of the current year and has recommended that the division manager, Richard Howell, submit a revised forecast for the remaining quarter, as the division has exceeded the annual plan yeartodate by 20 percent of operating income. An unexpected increase in billed hour volume over the original plan is the main reason for this increase in income. The original operating budget for the first three quarters for Toronto Business Associates follows. TORONTO BUSINESS ASSOCIATES 28x1 Operating Budget Total For First lst Quarter 2nd Quarter 3rd Quarter Three Quarters Revenue: Consulting fees: Computer system consulting $373,598 $373,589 $373,588 $1,128,589 Management consulting 292,598 292,589 292,588 877,589 Total consulting tees $666,898 $666,889 $666,888 $1,998,889 Other revenue 12,888 12,889 12,888 36,889 Total revenue $678,898 $678,889 $678,888 $2,834,889 Expenses: Consultant salary expenses $318,758 $318,759 $318,758 $ 956,259 Travel and related expenses 48,588 48,589 48,588 121,589 General and administrative expenses 184,898 184,889 184,888 312,889 Depreciation expense 44,888 44,889 44,888 132,889 Corporate expense allocation 54,888 54,889 54,888 162,889 Total expenses $551,259 $551,259 $551,259 $1,683,759 Operating income $116,758 $116,759 $116,758 $ 358,259 Howell will reflect the following information in his revised forecast for the fourth quarter. Toronto Business Associates currently has 25 consultants on staff. 10 for management consulting and 15 for computer systems consulting. Three additional management consultants have been hired to start work at the beginning of the fourth quarter in order to meet the increased client demand. The hourly billing rate for consulting revenue will remain at $75 per hour for each management consultant and $60 per hour for each computer consultant. However, due to the favorable increase in billing hour volume when compared to the plan. the hours for each consultant will be increased by 50 hours per quarter. The budgeted annual salaries and actual annual salaries. paid monthly. are the same: $54,000 for a management consultant and $50,000 for a computer consultant. Corporate management has approved a merit increase of 10 percent at the beginning of the fourth quarter for all 25 existing consultants, while the new consultants will be compensated at the planned rate. The planned salary expense includes a provision for employee fringe benefits amounting to 25 percent ofthe annual salaries. However, the improvement of some corporatewide employee programs will increase the fringe benefits to 40 percent. The original plan assumes a xed hourly rate for travel and other related expenses for each billing hour of consulting. These are expenses that are not reimbursed by the client, and the previously determined hourly rate has proven to be adequate to cover these costs. Other revenue is derived from temporary rentals and interest income and remains unchanged for the fourth quarter. General and administrative expenses have been favorable at 7 percent below the plan: this 7 percent savings on fourth quarter expenses will be reflected in the revised plan. Depreciation of office equipment and personal computers will stay constant at the projected straightline rate. Due to the favorable experience for the first three quarters and the division's increased ability to absorb costs, the corporate management at Maple Leaf Services has increased the corporate expense allocation by 50 percent. Required: 1. Prepare a revised operating budget for the fourth quarter for Toronto Business Associates that Richard Howell will present to corporate management. 2. Identify the circumstance under which an organization would prepare a revised operating budget. Required 1 Required 2 Prepare a revised operating budget for the fourth quarter for Toronto Business Associates that Richard Howell will present to corporate management. Revenue: Consulting fees: Computer system consulting Management consulting $1 Total consutting fees Other reven u e Total revenue Expenses: Consultant salary expenses Travel and related expenses General and administrative expenses Depreciation expense Corporate expense allocation Total expenses Operating income