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Managerial Accounting

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Flexible budget planning

Sam Yu, the president of Centech Computer Services, needs your help. He wonders about the potential effects on the firm's net income if he changes the service rate that the firm charges its customers. The following basic data pertains to fiscal year 2009.

Standard rate and variable costs:

Service rate per hour $83.00
Labor $40.00
Overhead $7.10
General, selling, and administrative $4.40
Expected fixed costs:

Facility repair $500,000.00
General, selling, and administrative $130,000.00

a. Prepare the pro forma income statement that would appear in the master budget if the firm expects to provide 27,000 hours of service in 2009.

b. A marketing consultant suggests to Mr. Yu that the service rate may affect the number of service hours that the firm can achieve. According to the consultant's analysis, if Centech charges customers $78 per hour, the firm can achieve 33,000 hours of service. Prepare a flexible budget using the consultant's assumptions.

c. The same consultant also suggests that if the firm raises its rate to $88 per hour, the number of service hours will decline to 22,000. Prepare a flexible budget using the new assumption.

d. Evaluate the three possible outcomes you determined in Requirements a, b, c and recommend a pricing strategy.

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