Knowledge Transfer Associates Is in the Process of Evaluating Its

question 104

Multiple Choice

Knowledge Transfer Associates is in the process of evaluating its new client services for the business systems consulting division.
∙ Server Planning,a new service,incurred $250,000 in development costs.
∙ The direct costs of providing the service,which is all labour,averages $50 per hour.
∙ Other costs for this service are estimated at $300,000 per year.
∙ The current program for server planning is expected to last for two years.At that time,expected new operating systems are likely to make the service non viable.
∙ Customer service expenses average $250 per client,with each job lasting an average of 40 hours.The current staff expects to bill 15,000 hours for each of the two years the program is in effect.Billing averages $90 per hour.
What is the estimated life-cycle operating income for both years combined?

• A)$206,250
• B)$162,500
• C)$(43,750)
• D)$(87,500)
• E)$412,500

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Definitions:

Operating Leverage

The degree to which a firm or project can increase operating income by increasing revenue, a measure of how revenue growth translates into growth in operating income.

Variable Costing

A managerial accounting method that includes only variable production costs (materials, labor, and overhead) in product costs, treating fixed manufacturing overhead as an expense of the period.

Absorption Costing

An accounting method that includes all manufacturing costs - direct materials, direct labor, and both variable and fixed manufacturing overhead - in the cost of a product.

Net Income

The total profit of a company after all expenses and taxes have been deducted from total revenues.