You are the manager of a consulting service. You have come across a potential employee that you believe will add value to the rm by
You are the manager of a consulting service. You have come across a potential employee that you believe will add value to the rm by attracting and serving more clients. The rm has given you the exibility to add this employee to the staff. However, your bonus is based on full absorption after- tax rm performance. You expect the new employee to bring in the following revenues and associated incremental costs: Year 202 1 2022 2023 'Number of "jobs" started ' 100 '125 i 100 Number of "jobs" completed 3'5 125 'Variable cost per "job" ' $200 '$200 ' $200 i Selling and Administrative costs for the year $10,000 10,000 $10,000 'New employee salary (Directly related to "jobs"]' $175,000 '$175,000' $176,000 Selling price per "job" $2,000 $2,000 $2,000 All costs are applied to the jobs when they are started {including the new employee salary}. 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" {it is like a xed overhead}. This section is bold because the timing is very important. The consulting service uses full absorption costing for both book and tax purposes. The \"inventory system" is rst in rst out {FIFO}. The discount rate for the rm 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; all costs are paid when the job is started. However, the clients pay their fees in cash at the end of the year in which the job is completed. Assume that the business has taxable income elsewhere such that there is tax credit if the reported income is less than 0 (there is a "positive" cash flow for the tax credit from negative income at the same rate; for example income of -$1000 yields a tax cash savings of $300, and after Tax income of -$700). When necessary, discount all cash ows to the beginning of the year 2021. Note that all cash paid and received in 2021 must be discounted 1 period, all cash paid and received in 2022 must be discounted 2 periods, and so on
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