computer associates international inc the world s leading bus 273006

Computer Associates International, Inc., the world’s leading business software company, delivers the end to end infrastructure to enable e business through innovative technology, services, and education. CA has 19,000 employees worldwide and recently had revenue of over $6 billion.

Presented below is information from the company’s annual report.

COMPUTER ASSOCIATES INTERNATIONAL

Management Discussion

The Company has experienced a pattern of business whereby revenue for its third and fourth fiscal quarters reflects an increase over first and second quarter revenue. The Company attributes this increase to clients’ increased spending at the end of their calendar year budgetary periods and the culmination of its annual sales plan. Since the Company’s costs do not increase proportionately with the third and fourth quarters’ increase in revenue, the higher revenue in these quarters results in greater profit margins and income. Fourth quarter profitability is traditionally affected by significant new hirings, training, and education expenditures for the succeeding year.

Instructions

(a) Why don’t the company’s costs increase proportionately as the revenues increase in the third and fourth quarters?

(b) What type of budgeting seems appropriate for the Computer Associates situation?