Question

Dhahran LTD are in the process of evaluating its new client services for the business consulting division.

• Estate Planning, a new service, incurred $300,000 in development costs and employee training.
• The direct costs of providing this service, which is all labor, averages $50 per hour.
• Other costs for this service are estimated at $1,000,000 per year.
• The current program for estate planning is expected to last for two years. At that time, a new law will be in place that will require new operating guidelines for the tax consulting.
• Customer service expenses average $200 per client, with each job lasting an average of 400 hours. The current staff expects to bill 40,000 hours for each of the two years the program is in effect. Billing averages $70 per hour.

(a) What are estimated life-cycle revenues?

(b) What is estimated life-cycle operating income for the first year?

Answer 1

(a) First year = 40,000 hours * $70 per hour = $2,800,000

Second year = 40,000 hours * $70 per hour = $2,800,000

Total revenues = $2,800,000 + $2,800,000 = $5,600,000

(b) Revenue = 40,000 hours * $70 per hour = $2,800,000

Development costs = $300,000

Direct costs = 40,000 hours * $50 per hour = $2,000,000

Indirect costs = $1,000,000

Customer service = $200 * 100 clients = $20,000

Total costs = $3,320,000

Operating income (loss) = $2,800,000 - $3,320,000 = (520,000)

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