Rock and Roehl Consulting, LLP uses CVP analysis to consider and manage the cost

Question

Rock and Roehl Consulting, LLP uses CVP analysis to consider and manage the costs of providing consulting services. Consulting revenues for the most recent period were $1,000,000. Management has determined that contribution margin was 35% of consulting revenues. Fixed costs were $224,000. Rock and Roehl currently charges a single hourly billing rate for all associate hours. Moreover, revenue is recognized on a "completed contract" basis (i.e no revenue is recognized until the service is complete). Rock and Roehl charged 10,000 hours during the period. The management team is concerned that certain costs previously classified as variable are actually fixed. If $50,000 of variable costs from last period were reclassified as fixed costs, using CVP: a) b) by how much would the break-even number of billing hours increase or decrease? by how much would the break-even point in consulting revenues increase or decrease?

Explanation / Answer

Given Data Revenue = $ 1000,000 Contribution Margin = 35 % Fixed cost = $ 224,000 Hour = 10000 Solution (a) Break Even Poin (unit) = Fixed Cost /Contribution per hour = $ 224,000 / $ 35    = 6,400 Hours Where Contribution per hour = Contribution / Hours = ($ 1000,000 x 35%) / 10,000 $ 35 If $ 50,000 variable cost is reclassified as fixed cost Break Even Poin (unit) = Fixed Cost /Contribution per hour = ( $ 224,000 + $ 50,000) / $ 40 = 6,850 Hours Since increase in Break even Hours = 6,850 hours - 6,400 hours = 450 hours Where Contribution per hour = Contribution / Hours = (($ 1000,000 x 35%)+ $ 50,000) / 10,000 $ 40 Note, if variable cost is reduced by $ 50,000 and fixed cost is increased Then Contribution is increased by $ 50,000 (b) Break even point (revenue) = Fixed Cost / p/v ratio = $ 224,000 / 0.35 = $ 640,000 If $ 50,000 variable cost is reclassified as fixed cost P/V ratio = Contribution / Sales = ($ 350,000 + $ 50,000) / $ 1000,000 = 0.4 Break even point (revenue) = Fixed Cost / p/v ratio = ( $ 224,000 + $ 50,000) / 0.4 = $ 685,000 Increase in Break even revenue = $ 685,000 - $ 640,000 = $ 45,000

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