SOFTWARE ASSOCIATES

MANAC ASSIGNMENT -3

Gaurav Nair – B19017

Nikhil Jindal – B19030
Ronit Ray – B19040
Sahil Gupta – B19041
Executive Summary:
On analysis of the case data available, it can be observed that the Gross Profit per consultant for both the
line of services was down by 20%. The inference that could be drawn division wise. For the Contracts
division, the cost per consultant went up by 20%, on the other hand, revenue per consultant was up by
just 8%. The only 2 possibilities which exist are that either the revenue per consultants haven’t kept up
with the rising costs per consultants or the projects taken are not of good enough margins. For the
Solutions department, the cost per consultant remained the same, but the Revenue went down by around
10%, which means either the industry is going through a recession, or all the consultants are not earning
enough.

Hence to increase the profitability of the company with increasing top line but reducing bottom line is to
charge a higher price from the Contract line customers and to downsize the Service line business to let go
of unprofitable consultants.

Problem Statement:
Richard Norton is the founder and CEO of Software Associates, which was founded in 1990 and provides
2 types of services: Contract and Solutions. He is pleased with the company’s performance of exceeding
billed hours and revenue targets. However, he is surprised to see that how higher revenues resulted in
less than half of the budgeted bottom line. He has asked Susan, CFO to explain this discrepancy.

The operating profits of the company were normally around 15-20% but the current year’s Q2 results had
a margin of only 9%, i.e., the cost per consultant were increasing with the same revenues.

Following are the answers to the 5 questions posed in the case:

Question 1:

Prepare a variance analysis report based on the information in Exhibit 1. Would this be sufficient to explain
the profit shortfall to Norton at the 8AM Meeting?

Answer:

Variance Analysis of Actual & Budgeted Income Statement, Q2, 2000

Particular Actual Budget Variance type
Revenues $ 3,264,000.00 $ 3,231,900.00 $ 32,100.00 Favorable
Expenses $ 2,967,610.00 $ 2,625,550.00 $ (342,060.00) Unfavorable
Operating Profit $ 296,390.00 $ 606,350.00 $ (309,960.00) Unfavorable
Profit % 9.08% 18.76%

Actual Revenues are more than the budgeted revenues by $32,100 but still the profit has decreased
drastically by $ 309,960 because the expenses have increased significantly by $ 342,060.
Question 2:

Prepare a variance analysis report based on the information in Exhibit 2?

Answer:

We can calculate the Selling Price variance and Sales Volume Variance with the Operating Statistics data
available in Exhibit 2:

Sales Price Variance = Actual Sales x (Actual Billing Rate – Budgeted Billing Rate)

= 39000 x (83.69 – 90.00)

= $(246,090), i.e., Unfavorable

Sales Volume Variance = Budgeted Billing Rate x (Actual Sales – Budgeted Sales)

= 90 x (39000 – 35910)

= $278,100, i.e., Favorable

Total Sales Variance = $278,000 - $246,090

= $32,010, i.e., Favorable

Question 3:

Prepare a spending and volume variance analysis of operating expenses based on the additional
information supplied in Exhibit 3?

Answer:
Total Actual Expenses = $938,560

Total Budgeted Expenses = $877,300 comprising of: -

a. Budgeted Variable Exp = $525,000

b. Budgeted Fixed Exp = $352,300

Budgeted Variable Exp per consultant = Budgeted Variable Exp / Budgeted No. of Consultants

= 525000/105

= $5,000

Hence Flexible Budget can be computed based on the actual current scenario by:

= Actual No. of Consultants x Budgeted Variable Exp per Consultant + Budgeted Fixed Exp

= 113 x 5000 + 352300

= $917,300

Hence, Variances using the Flexible Budget are as follows:

Expense Volume Variance = Budgeted Var Exp per Consultant x (Actual – Budgeted No. of Consultants)

= 5000 x (113 – 105)

= $40,000 Unfavorable

Total Expense Variance using Flexible Budget = Flexible Budget – Actual Expenses

= 917300 – 938560

= $(21,260) Unfavorable

Total variance between Actual and Initial Budget = 877300 – 938560

= $(61,260) Unfavorable

Question 4:

Prepare an analysis of the revenue change, separating the volume effect (increase in number of
consultants) from the productivity effect (billing percentage)?

Answer:

With the analysis of the Variance due to the Volume and Productivity, we are able to ascertain that the
overall Favorable effect in the revenues is due to these reasons and also find out the extent to which it is
contributed by these 2 effects. The following tables show the computed variances:
 Variance Analysis of Volume Effect Variance Analysis of Productivity Effect
Particular(Budget) Amount Particular Amount
Hours Supplied 47250 Actual Hours Supplied 50850
Hours Billed 35910 Actual Hours Billed 39000
Expected Billing % 76% Actual Billing % 76.70%
Expected Rate $ 90.00 Actual Rate $ 83.69

Actual Hours Supplied 50850 Expected Hours Billed 38646

Expected Billing 38646 Excess due to productivity 354
Excess Hours 2736 Variance $ 29,626.26
Variance $ 246,240.00

PTO
Question 5:

Prepare an analysis of actual versus budgeted revenues consultant expenses and margins using
additional information in Exhibit 4?

Answer:

Lines of Business Comparison

Particular Contract Solutions
Actual Budget Variance Actual Budget Variance
No. of Consultants 64 56 8 49 49 0

Billed Hours 24000 20160 3840 15000 15750 -750

Billed Hours / Consultants 375 360 15 306.12 321.43 -15.31
Supplied Hours 28800 25200 3600 22050 22050 0
Supplied Hours / Consultant 450 450 0 450 450 0
Idle Hours 4800 5040 -240 7050 6300 750
Idle Hours / Consultant 75 90 -15

Consultant Cost 1036800 756000 280800 992250 992250 0

Cost / Consultant 16200 13500 2700 20250 20250 0
Cost / Consultant per hour 43 38 5 66 63 3

Billed Revenues 1344000 1088640 255360 1920000 2143260 -223260

Revenues per consultant 21000 19440 1560 39184 43740 -4556
Revenues per consultant per hr 56 54 2 128 136 -8

Gross Profit 307200 332640 -25440 927750 1151010 -223260

Gross Profit per consultant 4800 5940 -1140 18934 23490 -4556
Gross Profit % 29.63% 44.00% -14.37% 93.50% 116% -22.50%