Susan, I have just seen the quarterly P& L. It’s great that we exceeded our billed hours and revenue targets. But why, with higher revenues, is our bottom line less than half of what we had budgeted. Can we have a meeting tomorrow morning at 8 AM so you can explain this discrepancy to me?

Richard Norton had founded Software Associates ten years ago to perform system integration projects for clients. While initially set up to operate in client- server environments, Norton had been nimble enough to make the transition to Web applications, and his company had continued to grow and prosper during the rapid technological evolution of the 1990s.

Annual revenues exceeded $ 12 million, and profit margins were usually between 15% and 20%. Currently, Software Associates offered two types of services to clients. The Solutions business helped clients rapidly develop targeted information management strategies, and then mobilized business and technology resources to deliver software solutions. Typical services included IT strategy and management, IT architecture and design, information management, and data warehousing. The Contract business offered clients experienced software engineers, program mers, and consultants, on a short- term project basis, to help the clients implement their own IT tools and solutions. This service enabled clients to implement major IT projects without having to hire expensive, experienced software personnel.

Expense Analysis

Jenkins knew that the budgeted operating expenses were neither entirely variable nor entirely fixed during the quarter. Some expenses varied during the quarter based on the number of con-sultants hired and working, while other were “ fixed,” independent of the number of consultants on board. Obviously, consultant expense varied with the number of consultants hired. Occu-pancy expenses, however, were fixed through the quarter unless she authorized the acquisition or rental of additional space. Expenses such as computing and telecommunications had both fixed and variable components. Because of the profit shortfall in Q2 2000, Jenkins knew that she had better be prepared to explain to Norton why expenses had exceeded the budgeted amounts. During the evening, she spent several hours studying the operating expense catego-ries, eventually preparing Software Associates Exhibit 3, which showed budgeted operating expenses by category and her judgment about their degree of variability. She also listed the actual operating expenses for the period on the exhibit.

Lines of Business

Jenkins was, by now, getting quite tired and was looking forward to returning home to catch a few hours of sleep. As she prepared to leave, however, she realized that Software Associates Exhibits 1 and 2 only reported on the aggregate financial performance of the firm. She knew that its two lines of business, Contract and Solutions, had quite different operating characteristics. Typically Richard Norton didn’t want to get too involved in the details of these different business lines. But perhaps some of the decline in profit margin and lower revenue per consultant could be attributed to operating results within each of the two lines of business. Jenkins reluctantly returned to her desk and started to gather more detailed information about the Contracting and Solution business lines. Several hours later, she had produced the data shown in Software Associates Exhibit 4.