Question

In: Accounting

Graber and Johnson, Attorneys at Law, recently opened a law practice in the Northwest. Their goal...

Graber and Johnson, Attorneys at Law, recently opened a law practice in the Northwest. Their goal is to generate a monthly net income of $10,000. They have initially set their billing rate at $150 per hour. Their billable hours in the first month of operations (January) were 150 and in the second month of operations (February) were 175 billable hours. The costs incurred at these levels for January and February are given below.

150 billable hours 175 billable hours
Salaries:
Mr. Graber $10,000.00 $10,000.00
Ms. Johnson 10,000.00 10,000.00
Legal Secretary 4,000.00 4,000.00
Depreciation (Furniture) 500.00 500.00
Supplies 450.00 525.00
Rent 1,000.00 1,000.00
Utilities 412.00 449.50
Total cost $26,362.00 $26,474.50

Required:

A. Classify each cost as fixed, variable, or mixed using billable hours as the driver.

Salaries
Depreciation (Furniture)
Supplies
Rent
Utilities

B. Use the high-low method to separate mixed costs into their fixed and variable components. Round the variable cost per billable hours to two decimal places.

$ per billable hour
$ fixed utility cost

C. Compute the net income (loss) for January and February. Round the answer to two decimal places.

January $
February $

D. If the attorneys expect to average 200 billable hours each month, what do they need to set as a billing rate per hour to achieve their goal of generating $10,000 of monthly net income? Round the answer to two decimal places.
$

Solutions

Expert Solution

A. CLASSIFICATION

Cost Type
Salaries Fixed Cost
Depreciation (Furniture) Fixed Cost
Supplies Variable Cost
Rent Fixed Cost
Utilities Mixed Cost

B. VARIABLE COST AND FIXED COST OF MIXED COST USING HIGH-LOW METHOD

Variable cost per billable hours

= (Highest level cost - Lowest level cost) / (Highest level activity - Lowest level activity)

Fixed cost = Total cost - (Billable hours * Variable cost per billable hour)

Variable cost per unit = ($449.50 - $412.00) / (175 - 150) = $1.50 per billable hour

Fixed cost = $449.50 - (175 billable hours * $1.50) = $187

C. NET INCOME (LOSS)

Particulars January February
A. Revenues (150 * $150) (175 * $150) $22,500.00 $26,250.00
Less: Costs
Salary - Mr. Graber $10,000.00 $10,000.00
Salary - Ms. Johnson $10,000.00 $10,000.00
Salary - Legal Secretary $4,000.00 $4,000.00
Depreciation (Furniture) $500.00 $500.00
Supplies $450.00 $525.00
Rent $1,000.00 $1,000.00
Utilities $412.00 $449.50
B. Total cost $26,362.00 $26,474.50
Net Income (Loss) A - B ($3,862.00) ($224.50)

D. BILLING RATE PER HOUR

Particulars $
Salary - Mr. Graber 10,000
Salary - Ms. Johnson 10,000
Salary - Legal Secretary 4,000
Depreciation (Furniture) 500
Supplies (200 * $3 per hour) 600
Rent 1,000
Utilities (200 * $1.50 per hour) + $187 487
Add: Net Income 10,000
Desired Revenue 36,587

Billable rate per hour = $36,587 / 200 billable hours = $182.94 per billable hour

All the best...

ekkarill92 answered 2 years ago
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