According to its original plan, Topeka Consulting Services Company plans to charge its customers for service at $120 per hour in Year 2. The company president expects consulting services provided to customers to reach 45,000 hours at that rate. The marketing manager, however, argues that actual results may range from 40,000 hours to 50,000 hours because of market uncertainty. Topeka's standard variable cost is $45 per hour, and its standard fixed cost is $1,350,000. Required:
Develop flexible budgets based on the assumptions of service levels at 40,000 hours, 45,000 hours, and 50,000 hours.

Net income at 40,000 hours = $1,650,000

Net income at 45,000 hours = $2,025,000

Net income at 50,000 hours = $2,400,000

Explanation:

The flexible can be prepared as follows:

Topeka Consulting Services Company

Flexible Budgets for Year 2

                                                        40,000          45,000            50,000

                                                          Hours            Hours              Hours

Details                                                    $                    $                      $            

Service income ($120 * Hours)    4,800,000     5,400,000      6,000,00

Variable cost ($45 * Hours)         (1,800,000)   (2,025,000)   (2,250,000)

Contribution margin                     3,000,000      3,375,000      3,750,000

Fixed cost                                    (1,350,000)   (1,350,000)    (1,350,000)

Net income                                   1,650,000     2,025,000   2,400,000