1
ACCT 5331
Fall 2023
Graded Assignment #2
Kaiser and Company is a firm of professional accountants. The firm consists of 10 partners, 30
associates, and 25 staff members. The firm provides two broad types of service to their clients:
auditing and consulting. Any consulting work done for auditing clients is compliant with
Sarbanes-Oxley and a significant portion of this work is done for non-audit clients. Each
employee can work on either auditing or consulting services. The two types of services differ in
terms of the mix of professionals used.
a. Auditing work requires two partners, four associates, and four staff members for every
hour of work performed for the client (client hour).
b. Consulting work requires three partners, two associates, and two staff members for every
hour of work performed for the client (client hour).
Kaiser and Company treats the salaries of its professional accountants as fixed costs. Partners
earn, on average, $210,000 per year and work about 2,800 hours. Associates earn, on average,
$75,000 per year and work about 2,000 hours. Staff members earn, on average, $45,000 per year
and work about 1,900 hours.
In addition to professional accountant costs, Kaiser and Company has other fixed costs
amounting to $1,500,000 per year. These other fixed costs are allocated to jobs based on
employee hours worked using a rate equal to the fixed costs divided by employee hours
available. Kaiser and Company has variable costs, which are estimated as:
a. $4.50 per hour of partner time worked
b. $18.00 per hour of associate time worked
c. $10.50 per hour of staff time worked
Kaiser and Company has developed an average cost per hour of client time demanded using the
following approach:
Item
Partner
Associate
Staff
Total
Salaries
$210,000 * 10
$75,000 * 30
$45,000 * 25
$5,475,000
Hours worked
10 * 2,800
30 * 2,000
25 * 1,900
135,500
Variable costs
10 * 2,800 * 4.5 30 * 2,000 * 18 25 * 1,900 * 10.5 $1,704,750
Other fixed costs
$1,500,000
Total costs
$8,679,750
Average cost per hour
$64.06
Audit cost per hour
2 * 64.06
4 * 64.06
4 * 64.06
$640.57
Consulting cost per hour 3 * 64.06
2 * 64.06
2 * 64.06
$448.40
The market rate is $765 per client hour for audit services and $510 per client hour for consulting
services. For the upcoming year, Kaiser and Company expects that demand will exceed capacity
for both types of services. Therefore, Kaiser and Company is faced with the need to decide the
optimal mix of jobs to offer.
Continued on back
2
Required (please solve the following using Excel Solver):
1. If the average cost calculations given in the table in the problem are used in determining
the ‘optimal’ plan, what are the ‘optimal’ numbers of client hours that should be used for
auditing and for consulting during the year? Why is this not likely to be the truly optimal
production mix? (Hint: In this part, you only need variables for audit client hours and
consulting client hours). (8 points)
2. What are the optimal numbers of client hours that should be spent on auditing and on
consulting for the year? Under this optimal plan, how many partner, associate, and staff
hours will be used? (Hint: You should find a contribution margin of approximately
$7,875,563). (8 points)
3. Kaiser and Company has an associated firm – Redford and Division – that will use the
services of any Kaiser and Company employee. Redford will pay Kaiser an hourly rate
equal to that employee’s annual salary divided by annual hours worked (not including the
Redford work). The $1,500,000 in other fixed costs for Kaiser and Company would still
remain the same. What are the optimal numbers of partner, associate, and staff hours that
should be spent for the year on a) auditing, b) consulting, and c) Redford and Division?
Under this optimal plan, what is the contribution margin? (9 points)
Extra credit:
4. Continuing the assumptions of requirement 3, suppose that Kaiser and Company faces a
demand for audit services of 1,200 client hours each month for January through April and
600 client hours each month for the rest of the year. Kaiser and Company faces a
demand for consulting services of 400 hours each month during the entire year. Assume
also that the maximum amount of time that each professional accountant can work each
month is 10% of total annual hours, subject to the condition that total hours worked for
the year cannot exceed the indicated number of annual work hours. What are the optimal
numbers of partner, associate, and staff hours that should be spent for i) January through
April and ii) the rest of the year on a) auditing, b) consulting, and c) Redford and
Division? (8 points extra credit)
Please submit via email 1) a copy of your solutions with accompanying work, including the
linear programming objective function and constraints, in Microsoft Word, and 2) a copy of your
Excel Solver worksheet and answer report.
Due on Friday, October 13 at 11:59 PM.
If you turn in assignment late:
1 min. to 24 hrs. late
3 point deduction
24 hrs. to 48 hrs. late
6 point deduction
etc.
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