8-20A: Flexible budget planning

Like Chou, the president of Digitech Computer Service, 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 pertain to fiscal year 2012.

Required

a. Prepare the pro forma income statement that would appear in the master budget if the firm expects to provide 30,000 hours of services in 2012.

b. A marketing consultant suggests to Mr. Chou that the service rate may affect the number of services hours that the firm can achieve. According to the consultant’s analysis, if Digitech charges customers $75 per hour, the firm can achieve 38,000 hours of services. Prepare a flexible budget using the consultant’s assumption.

c. The same consultant also suggests that if the firm raises it rate to $85 per hour, the number of service hours will decline to $25,000. Prepare a flexible budget using the new assumption.

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