Carmen Seville and Don Turco jointly own Bright Green Temp Services (BGTS) Carme
ID: 2396474 • Letter: C
Question
Carmen Seville and Don Turco jointly own Bright Green Temp Services (BGTS) Carmen owns 61 percent and Don owns 39 percent. The company provides temporary clerical services at a rate of $51 per hour. During the past year, its clients used 25,000 hours of temporary services Big City Developers purchased 3,900 hours of temporary services from BGTS last year. Carmen has a 21 percent interest in Big City Developers, and Don has a 61 percent interest in it. At the end of the year, Don suggested that BGTS give Big City Developers a 10 percent reduction in the hourly rate charged next year in recognition of its large purchases and desirability as a client. Required: Assuming that Big City Developers purchases the same number of hours and that al other costs and activities remain the same in the coming year, what effect would the price reduction have on BGTS's operating profits that accrue to Carmen and to Don for the coming year? (Decrease in profits should be indicated by minus sign wherever appropriate.) Total Shares (61% Shares (39% and 21 and 61 Decrease in profits at BGTS Increase in profits at Big City Developers Net change in profitsExplanation / Answer
Total Number of Hours Purchased by the Big city Developers = 3900 Hrs
Total Discount = 3900x51x10%
=19890
Effect Price reduction on BGTS’s operating profit
Ms Seville's Shares (61%, 21%)
TotalMs Seville's Shares (61%, 21%)
Mr Turcos's Shares (39%, 61%) Change in Profits at BGTS -19890 -12132.9 ( -19890x61%) -7757 (-19890x39%) 0Increase in Profits at Big City Developers 19890 7757.1 (19890x 31%) 12132.9 (19890x69%) Net Change in Profits 0 4375.8 -4375.8