Answer the following questions using the information below:
Waugh,Chapple,Border and Associates is in the process of evaluating its new client services for the business consulting division.
∙ Estate planning,a new service,incurred $600 000 in development costs and employee training.
∙ The direct costs of providing this service,which is all labour,averages $100 per hour.
∙ Other costs for this service are estimated at $2 000 000 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 $400 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 $140 per hour.
-What are the estimated life-cycle revenues?
A)$22 400 000
B)$6 400 000
C)$11 200 000
D)$8 000 000

Question

Quizplus · Accepted Answer

We can calculate the estimated life-cycle revenues by multiplying the number of billable hours (40,000 hours for 2 years, or 80,000 hours in total), the hourly billing rate ($140 per hour), and the number of clients served (which is not given, but can be calculated by dividing the total direct costs by the average customer service expenses per client and the average job duration: $600,000 / ($400 per client x 400 hours per job) = 37.5 clients). Therefore, the estimated life-cycle revenues are: 80,000 hours x $140 per hour x 37.5 clients = $42 million. However, we need to subtract the total costs for the service for the same period: $600,000 (development costs and training) + $2 million x 2 years = $4.6 million. Therefore, the estimated life-cycle revenues are $42 million - $4.6 million = $37.4 million, which approximates to $11.2 million per year. Therefore, the best choice is C.

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