XYZ Ventures is a small firm of accountants specialising in producing end of year financial statements for SMEs. They have just produced their budget for next year based on two different levels of chargeable hours as follows:

Chargeable hours 4,000 6,000

Income 480,000 720,000

Materials 60,000 90,000

Labour 239,000 339,000

Overheads 190,000 210,000

Net Profit (9,000) 81,000

Required:

1. Calculate the fixed and variable elements of the material, labour and overhead costs.
2. Calculate the break- even point in number of chargeable hours.
3. Calculate how many hours would need to be charged for the firm to make a target profit of 135,000.

In order to try to achieve this target profit, one of the senior partners has suggested lowering the charge-out rate per hour by 10%. To offset this lower contribution margin, some of the work could be outsourced which would lower overhead fixed costs by 45,000 per year and would decrease the variable element of labour by an extra 5 per chargeable hour. However, it is expected that the lower charge out rates would increase the chargeable hours to 7,000.

4. Discuss whether the target profit can be achieved if the advice of the senior partner is taken.
5. Calculate the new break-even point of the firm in number of chargeable hours.
6. Discuss the reliability of the figures you have calculated taking into account the limitations of analysing costs into their fixed and variable elements. In particular discuss the suitability of the high/low method for analyzing semi-variable costs and any other techniques which can be used.