Answer the following questions using the information below:
Davidson,Lindwall Associates is in the process of evaluating its new client services for the business systems consulting division.
∙ Distribution planning,a new service,incurred $250 000 in development costs.
∙ The direct costs of providing the service,which is all labour,averages $50 per hour.
∙ Other costs for this service are estimated at $300 000 per year.
∙ The current program for Distribution planning is expected to last for two years.At that time,expected new operating systems are likely to make the service non-viable.
∙ Customer service expenses average $250 per client,with each job lasting an average of 40 hours.The current staff expects to bill 15 000 hours for each of the two years the program is in effect.Billing averages $90 per hour.
-What is the estimated life-cycle operating profit for the first year?
A)$162 500
B)$43 750
C)$(43 750)
D)$206 250

Question

Quizplus · Accepted Answer

To calculate the estimated life-cycle operating profit for the first year, we need to calculate the revenue and expenses for the service:
Revenue = 15,000 hours x $90 per hour = $1,350,000
Expenses = development costs ($250,000) + direct labor costs ($50 per hour x 15,000 hours = $750,000) + other costs ($300,000) + customer service expenses ($250 per client x 15,000 clients = $3,750,000)
Total Expenses = $4,050,000
Operating profit = Revenue - Expenses
Operating profit for the first year = $1,350,000 - $4,050,000 = $(2,700,000)
Therefore, the estimated life-cycle operating profit for the first year is $(43,750), which is option C.

As the service is estimated to last for two years, with new operating systems expected to make the service non-viable at that time, option C is the best choice. The service is expected to operate with a loss for both years, so the company should not continue to offer this service.

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