Answer the following questions using the information below:

Ibrahim & Associates 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.

-What is estimated life-cycle operating income for the first year?
A) $3,320,000
B) $(700,000)
C) $2,800,000
D) $(520,000)

Question

Answer the following questions using the information below:

Ibrahim & Associates 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.

-What is estimated life-cycle operating income for the first year?
A) $3,320,000
B) $(700,000)
C) $2,800,000
D) $(520,000)

Quizplus · Accepted Answer

The estimated life-cycle operating income for the first year can be calculated as follows: Revenue = 40,000 hours * $70/hour = $2,800,000. Direct costs = 40,000 hours * $50/hour = $2,000,000. Other costs = $1,000,000. Customer service expenses = (40,000 hours / 400 hours/job) * $200/client = $20,000. Total costs = $2,000,000 + $1,000,000 + $20,000 = $3,020,000. Operating income = Revenue - Total costs = $2,800,000 - $3,020,000 = -$220,000. However, the development costs of $300,000 are not included in the first year's calculation as they are likely to be amortized over the life cycle of the service. Therefore, the closest answer reflecting the first year's operating income without considering development costs is D) $(520,000), which seems to be a mistake in calculation. The correct calculation should result in a loss, but the provided options do not accurately reflect the correct calculation based on the given data.

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