Question

Michael McNamara and Gregory Lau met while in university and always knew they wanted to be in business together. Shortly after university Michael went to work for a large mulinational firm while Gregory pursued an MBA.

After several years of experience the firm Lau McNamara was established on July 1, 1984 and the firm experienced slow but steady growth over time. It is now 2020 and Lau McNamara has grown to total staff of 55 employees and revenues exceeding $13,000,000 a year. They have largely grown in the area of consulting, tax and accounting.

About 5 years ago they hired a rising star Rose Femia. She has exceeded all expectations and has been pushing to expand the services provided by the firm to include assurance services. Mr. McNamara with his extensive contacts has been asked to bid on a contract to perform audits for 3 municipalities within the province of Ontario.

He has assigned this task to Ms. Femia.

At the moment staff are fully scheduled, if Lau McNamara were to be awarded the contract, it must hire one new staff member at an annual remuneration of $64,000 to handle the additional workload.

Ms. Femia is convinced that obtaining the contract will lead to additional new clients from the respective municipalities. Expected new work (excluding the three municipalities) is 870 hours at an average billing rate of $90 per hour. Other information follows about the firm’s current annual revenues and costs:

Firm volume in hours (normal)		30,750
Fixed costs	$	575,000
Variable cost	$	35	/hr

Should the firm win the contract, the audits of the three municipalities will require 830 hours of expected work.

As a side note, Michael McNamara is adamant that fixed costs should be considered for this short term bid. Gregory Lau argues that they should be disregarded for short-term decision making.

Required:

1. If the Rose Femia’s expectations are correct, what is the lowest bid the firm can submit and still expect to increase annual net income? What would be the hourly billing rate for the county audit jobs just to break even on all the new business? (Round "Average billing rate" answer to 2 decimal places.)

2. If the contract is obtained at a price of $45,200, what is the minimum number of hours of new business in addition to the municipality work that must be obtained for the firm to break even on total new business? What is the margin of safety (MOS) regarding the municipality job audit proposal?

Answer 1