Michael McNamara and Gregory Lau met while in university andalways knew they wanted to be in business together. Shortly afteruniversity Michael went to work for a large mulinational firm whileGregory pursued an MBA.
After several years of experience the firm Lau McNamara wasestablished on July 1, 1984 and the firm experienced slow butsteady growth over time. It is now 2020 and Lau McNamara has grownto total staff of 55 employees and revenues exceeding $13,000,000 ayear. They have largely grown in the area of consulting, tax andaccounting.
About 5 years ago they hired a rising star Rose Femia. She hasexceeded all expectations and has been pushing to expand theservices provided by the firm to include assurance services. Mr.McNamara with his extensive contacts has been asked to bid on acontract to perform audits for 3 municipalities within the provinceof Ontario.
He has assigned this task to Ms. Femia.
At the moment staff are fully scheduled, if Lau McNamara were tobe awarded the contract, it must hire one new staff member at anannual remuneration of $60,000 to handle the additionalworkload.
Ms. Femia is convinced that obtaining the contract will lead toadditional new clients from the respective municipalities. Expectednew work (excluding the three municipalities) is 830 hours at anaverage billing rate of $90 per hour. Other information followsabout 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 threemunicipalities will require 870 hours of expected work.
As a side note, Michael McNamara is adamant that fixed costsshould be considered for this short term bid. Gregory Lau arguesthat they should be disregarded for short-term decision making.
Required:
1. If the Rose Femia’s expectations are correct, what is thelowest bid the firm can submit and still expect to increase annualnet income? What would be the hourly billing rate for the countyaudit jobs just to break even on all the new business?(Round "Average billing rate" answer to 2 decimalplaces.)
2. If the contract is obtained at a price of $44,800, what isthe minimum number of hours of new business in addition to themunicipality work that must be obtained for the firm to break evenon total new business? What is the margin of safety (MOS) regardingthe municipality job audit proposal?
