Leary and O'Donnell, a local CPA firm, has been asked to bid on a contract to perform audits for three counties in its home state. Should the firm be awarded the contract, it must hire one new staff member at a salary of $52,000 to handle the additional workload. (Existing staff are fully scheduled.) The managing partner is convinced that obtaining the contract will lead to additional new profit-oriented clients from the respective counties. Expected new work (excluding the three counties) is 750 hours at an average billing rate of $90.00 per hour. Other information follows about the firm's current annual revenues and costs:
Firm volume in hours (normal).................................... 30,750
Fixed costs....................................................... $ 575,000
Variable costs..................................................... $35.00/hr
Should the firm win the contract, these audits will require 950 hours of expected work.
Required
1. If the managing partner's expectations are correct, what is the lowest bid the firm can submit and still expect to increase annual net income? What would be the hourly billing rate for the county audit job at the breakeven level?
2. If the contract is obtained at a price of $44,000, what is the minimum number of hours of new business in addition to the county work that must be obtained for the firm to break even on total new business? What is the margin of safety (MOS) regarding the county audit job proposal?