Author Question: Alternative allocation bases for a professional services firm. The Walliston Group (WG) provides ... (Read 91 times)

Alainaaa8 · **on:** Jul 6, 2018

Alternative allocation bases for a professional services firm.

The Walliston Group (WG) provides tax advice to multinational firms. WG charges clients for (a) direct professional time (at an hourly rate) and (b) support services (at 30 of the direct professional costs billed). The three professionals in WG and their rates per professional hour are as follows:

WG has just prepared the May 2014 bills for two clients. The hours of professional time spent on each client are as follows:

Required:
1. What amounts did WG bill to San Antonio Dominion and Amsterdam Enterprises for May 2014?
2. Suppose support services were billed at 75 per professional labor-hour (instead of 30 of professional labor costs). How would this change affect the amounts WG billed to the two clients for May 2014? Comment on the differences between the amounts billed in requirements 1 and 2.
3. How would you determine whether professional labor costs or professional labor-hours is the more appropriate allocation base for WG's support services?

Question 2

CVP, Not for profit

Genesee Music Society is a not-for-profit organization that brings guest artists to the community's greater metropolitan area. The music society just bought a small concert hall in the center of town to house its performances. The lease payments on the concert hall are expected to be 4,000 per month. The organization pays its guest performers 1,800 per concert and anticipates corresponding ticket sales to be 4,500 per concert. The music society also incurs costs of approximately 1,000 per concert for marketing and advertising. The organization pays its artistic director 33,000 per year and expects to receive 30,000 in donations in addition to its ticket sales.

Required:
1. If the Genesee Music Society just breaks even, how many concerts does it hold?
2. In addition to the organization's artistic director, the music society would like to hire a marketing director for 25,500 per year. What is the breakeven point? The music society anticipates that the addition of a marketing director would allow the organization to increase the number of concerts to 41 per year. What is the music society's operating income/(loss) if it hires the new marketing director?
3. The music society expects to receive a grant that would provide the organization with an additional 17,000 toward the payment of the marketing director's salary. What is the breakeven point if the music society hires the marketing director and receives the grant?

ecabral0 · **Reply #1 on:** Jul 6, 2018

Answer to Question 1

1.
Direct Professional Time Support Services Amount

Client Rate per Hour Number
of Hours
Total
Rate
Total Billed to
Client
(1) (2) (3) (4) = (2) (3) (5) (6) = (4) (5) (7) = (4) + (6)
SAN ANTONIO
DOMINION
Walliston
Boutin
Abbington

640
220
100

26
5
39

16,640
1,100
3,900

30
30
30

4,992
330
1,170

21,632
1,430
5,070
28,132
AMSTERDAM
ENTERPRISES
Walliston
Boutin
Abbington

640
220
100

4
14
52

2,560
3,080
5,200

30
30
30

768
924
1,560

3,328
4,004
6,760
14,092

2.
Direct Professional Time Support Services

Client Rate per Hour Number
of Hours
Total Rate per Hour
Total Amount
Billed to
Client
(1) (2) (3) (4) = (2) (3) (5) (6) = (3) (5) (7) = (4) + (6)
SAN ANTONIO
DOMINION
Walliston
Boutin
Abbington

640
220
100

26
5
39

16,640
1,100
3,900

75
75
75

1,950
375
2,925

18,590
1,475
6,825
26,890
AMSTERDAM
ENTERPRISES
Walliston
Boutin
Abbington

640
220
100

4
14
52

2,560
3,080
5,200

75
75
75

300
1,050
3,900

2,860
4,130
9,100
16,090

Requirement 1 Requirement 2
San Antonio Dominion 28,132 26,890
Amsterdam Enterprises 14,092 16,090
42,224 42,980

Both clients use 70 hours of professional labor time. However, San Antonio Dominion uses a higher proportion of Walliston's time (26 hours), which is more costly. This attracts the highest support-services charge when allocated on the basis of direct professional labor costs.

3. Assume that the Walliston Group uses a cause-and-effect criterion when choosing the allocation base for support services. You could use several pieces of evidence to determine whether professional labor costs or hours is the driver of support-service costs:

a. Interviews with personnel. For example, staff in the major cost categories in support services could be interviewed to determine whether Walliston requires more support per hour than, say, Abbington. The professional labor costs allocation base implies that an hour of Walliston's time requires 6.40 (640 100) times more support-service dollars than does an hour of Abbington's time.
b. Analysis of tasks undertaken for selected clients. For example, if computer-related costs are a sizable part of support costs, you could determine if there was a systematic relationship between the percentage involvement of professionals with high billing rates on cases and the computer resources consumed for those cases.

Answer to Question 2

1. Ticket sales per concert 4,500
Variable costs per concert:
Guest performers 1,800
Marketing and advertising 1,000
Total variable costs per concert 2,800
Contribution margin per concert 1,700

Fixed costs
Salaries 33,000
Lease payments (4,000 12) 48,000
Total fixed costs 81,000
Less donations 30,000
Net fixed costs 51,000

Breakeven point in units = = = 30 concerts

Check
Donations 30,000
Revenue (4,500 30) 135,000
Total revenue 165,000

Less variable costs
Guest performers (1,800 30) 54,000
Marketing and advertising (1,000 30) 30,000
Total variable costs 84,000

Less fixed costs
Salaries 33,000
Mortgage payments 48,000
Total fixed costs 81,000
Operating income 0

2. Ticket sales per concert 4,500
Variable costs per concert:
Guest performers 1,800
Marketing and advertising 1,000
Total variable costs per concert 2,800
Contribution margin per concert 1,700
Fixed costs
Salaries (33,000 + 25,500) 58,500
Lease payments (4,000 12) 48,000
Total fixed costs 106,500
Less donations 30,000
Net fixed costs 76,500

Breakeven point in units = = = 45 concerts

Check
Donations 30,000
Revenue (4,500 45) 202,500
Total revenue 232,500

Less variable costs
Guest performers (1,800 45) 81,000
Marketing and advertising (1,000 45) 45,000
Total variable costs 126,000

Less fixed costs
Salaries 58,500
Lease payments 48,000
Total fixed costs 106,500
Operating income 0

Operating Income if 41 concerts are held
Donations 30,000
Revenue (4,500 41) 184,500
Total revenue 214,500

Less variable costs
Guest performers (1,800 41) 73,800
Marketing and advertising (1,000 41) 41,000
Total variable costs 114,800

Less fixed costs
Salaries 58,500
Lease payments 48,000
Total fixed costs 106,500
Operating income (loss) (6,800)

The Music Society would not be able to afford the new marketing director if the number of concerts were to increase to only 41 events. The addition of the new marketing director would require the Music Society to hold at least 45 concerts in order to breakeven. If only 41 concerts were held, the organization would lose 6,800 annually. The Music Society could look for other contributions to support the new marketing director's salary or perhaps increase the number of attendees per concert if the number of concerts could not be increased beyond 41.

3. Ticket sales per concert 4,500
Variable costs per concert:
Guest performers 1,800
Marketing and advertising 1,000
Total variable costs per concert 2,800
Contribution margin per concert 1,700

Fixed costs
Salaries (33,000 + 25,500) 58,500
Lease payments (4,000 12) 48,000
Total fixed costs 106,500
Deduct donations 47,000
Net fixed costs 59,500

Breakeven point in units = = = 35 concerts

Check
Donations 47,000
Revenue (4,500 35) 157,500
Total revenue 204,500

Less variable costs
Guest performers (1,800 35) 63,000
Marketing and advertising (1,000 35) 35,000
Total variable costs 98,000

Less fixed costs
Salaries 58,500
Mortgage payments 48,000
Total fixed costs 106,500
Operating income 0