You are the manager of a consulting service. You have come across a potential employee that you believe will add value to the firm by attracting and serving more clients. The firm has given you the flexibility to add this employee to the staff. However, your bonus is based on full absorption after-tax firm performance. You expect the new employee to bring in the following revenues and associated incremental costs:

Period 1 Period 2 Period 3

Number of "jobs" started 100, 125, 125

Number of "jobs" completed 75, 100, 150

Variable cost per "job" $200, $200, $200

Selling and Administrative costs $10,000, $10,000, $10,000

New employee salary (to "jobs") $175,000, $175,000, $175,000

Selling price per "job" $2,000, $2,000, $2,000,

All

costs are applied to the jobs when they are started, but the revenues are not

earned (the job is not sold) until the job is complete. Assume that the new

employee salary is a direct input for the "jobs", but does not vary

with the number of "jobs" (like a fixed overhead).The

consulting service uses full absorption costing for both book and tax purposes.

The "inventory system" is first in first out (FIFO). The discount rate for the

firm is 12% and the tax rate is 30%. Assume that all costs (including salary

and taxes) are paid in cash at the end of the year in which they occur and the

clients pay their fees in cash at the end of the year in which the job is

completed. Also, assume that there is no tax paid or tax credit if the reported

income is less than 0. When necessary, discount all cash flows to the beginning

of period 1 (note that all cash paid and received in period 1 must be

discounted 1 period, Period 2 discounted 2 periods, and Period 3 discounted

three periods).

(Note: For the questions below, ignore other income sources the

firm may have, i.e. only consider the projects described above, facilitated by

the new employee)

The present value of 1$ at the discount rate of 12% is follows:

Period Present Value of 1$

1 0.893

2 0.797

3 0.712

4 0.636

What is the COGM the year PERIOD 3?

What is the COGS for the year PERIOD 3?