You are the manager of a consulting service. You have come across a potential employee that you believe will add value to the firm by attracting and serving more clients. The firm has given you the flexibility to add this employee to the staff. However, your bonus is based on full absorption after$-$tax firm performance. You expect the new employee to bring in the following revenues and associated incremental costs:

Years $2021,2022,2023$;

Number of Jobs Started: $100,125,100,$ respectively

Number of Jobs Completed: $75,25,125,$ respectively

Variable Cost per Job: $$200,$ $$200,$ $$200,$ respectively

Average Cost per Job: $$1900,$ $$1600,$ $$2000,$ respectively

Selling and Administrative costs for the year: $$10,000$ all years

New employee salary $($Directly related to "jobs"$)$: $$175,000$ all years

Selling price per "job": $$2000$ all years

$**$All costs are applied to the jobs when they are started $($including the new employee salary$).$The revenues are not earned $($the job is not sold$)$ until the job is complete. Assume that the new employee salary is a direct input for the "jobs", but does not vary with the number of $$jobs$($it is like a fixed overhead$).$ This section is starred because the timing is very important.$**$

The consulting service uses full absorption costing for both book and tax purposes. The $$inventory system$$ is first in first out $($FIFO$).$ The discount rate for the firm is $12\%$ and the tax rate is $30\%.$

Assume that all costs $($including salary and taxes$)$ are paid in cash at the end of the year in which they occur; all costs are paid when the job is started. However, the clients pay their fees in cash at the end of the year in which the job is completed. Assume that the business has taxable income elsewhere such that there is tax credit if the reported income is less than $0($there is a "positive" cash flow for the tax credit from negative income at the same rate; for example income of $-$$$1000$ yields a tax cash savings of $$300,$ and after Tax income of $-$$$700).$

When necessary, discount all cash flows to the beginning of the year $2021.$ Note that all cash paid and received in $2021$ must be discounted $1$ period, all cash paid and received in $2022$ must be discounted $2$ periods, and so on$."$

Please answer the following questions.

$-$What is the COGS for the year $2023?$

$-$What is the COGM the year $2023?$

$-$What is the Pre$-$Tax Net income in $2021?$

$-$What is the net present value of hiring the new employee over the years $2021$ through $2023$ from the

firm$$s perspective at the beginning of year $2021?$ Recall that the business has taxable income

elsewhere such that there is tax credit if the reported income is less than $0($there is a "positive" cash

flow for the tax credit from negative income at the same rate; for example income of $-$$$1000$ yields a

tax cash savings of $$300,$ and after Tax income of $-$$$700).$

$-$Is it in the best interest of the firm to hire the employee?

$\_$What is the net present value of the manager$$s bonus $($to the manager$)$ over the first three years of

the new hire $($project$)$ if the manager$$s bonus is based on $10\%$ of annual profits of the division after

tax and the manager is penalized for $10\%$ of any losses? Assume that the manager uses the same

discount rate as the firm $(12\%).$ Also recall that the that the business has taxable income elsewhere

such that there is tax credit if the reported income is less than $0($there is a "positive" cash flow for the

tax credit from negative income at the same rate; for example income of $-$$$1000$ yields a tax cash

savings of $$300,$ and after Tax income of $-$$$700.$ That tax credit also increase the After Tax Income

when calculating the manager's bonus. For example, pre$-$tax income of $-$$$1000$ yields a tax credit of

$$300,$ so the manager's bonus in that year would be $10\%$ of $-$$$700=-$$$70($a penalty$).$

$-$Is it in the best interest of the manager to hire the employee $($recall that the manager is interested in

his compensation, not necessarily the NPV of the firm$)?$

$-$Assume that the manager intends to retire at the end of the $2021.$ Recall that the manager$$s bonus is

based on $10\%$ of annual profits of the division after tax and the manager is penalized for $10\%$ of any

losses? Assume that the manager uses the same discount rate as the firm $(12\%).$ Also recall that the

that the business has taxable income elsewhere such that there is tax credit if the reported income is

less than $0($there is a "positive" cash flow for the tax credit from negative income at the same rate; for

example income of $-$$$1000$ yields a tax cash savings of $$300,$ and after Tax income of $-$$$700).$

Will the manager take the project $($assume the manager only takes project that are positive NPV from

his personal wealth perspective$)?$

Answer rating: 100% (QA)

Answer 1 What is the COGS for the year 2023 The COGS Cost of Goods Sold for the year 2023 can be calculated as follows Variable Cost per Job 200 Avera... View the full answer