Primus is a firm of consultants that focuses on process reengineering and quality improvement initiatives for IT companies. Northwood Industries has asked Primus to conduct a study aimed at improving on-time delivery. Normal practice for Primus is to bill for consultant time at standard rates plus actual travel costs and estimated overhead. However, Northwood has offered a flat $75,000 for the job. Currently, Primus has excess capacity in that it can take on the Northwood job without turning down other business and without hiring additional staff.
If normal practices were followed, the bill would be:
- 90 hours of Partner time at $260 per hour.
- 125 hours of Senior Consultant time at $160 per hour.
- 160 hours of Staff Consultant time at $90 per hour.
- Estimated $21,000 in travel costs.
- Overhead costs at $300 per nonpartner hour.
Overhead (Computer Costs, rent, utilities, paper, copying, etc.) is determined at the start of the year by dividing the estimated annual overhead costs ($2,400,000) by the total estimated nonpartner hours (80,000). Approximately 20% of the total amount is variable costs.
All Primus employees receive a fixed annual wage with no overtime. In hourly terms, Partners are paid $250 per hour, Senior Consultants are paid $150 per hour, and Staff Consultants make $80 per hour.
What will be the effect on company profit if you accept the Northwood Industries job? What qualitative factors should be considered in the decision as to whether or not to accept the job?