III. Case Study:
Primus is a firm of consultants that focuses on process reengineering and quality improvement initiatives. Northwood Industries has asked Primus to conduct a study aimed at improving on-time delivery. Normal practice is for Primus to bill for consultant time at standard rates plus actual travel costs and estimated overhead. However, Northwood has offered a flat $85,000 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:
Classification Hours Rate Amount
Partner 100 $250 $25,000
Senior Consultant 200 $150 $30,000
Staff Consultant 200 $ 80 $16,000
Travel Costs $15,000
Overhead at $20 per non-partner hour $ 8,000
Total $94,000
Overhead (computer costs, rent, utilities, paper, copying etc.) is determined at the start of the year by dividing estimated annual overhead costs ($1,600,000) by total estimated non-partner hours (80,000 hours). Approximately 10% of the total amount is variable costs.
All Primus employees receive a fixed wage (i.e., there is no compensation for overtime.). Annual compensation in the previous year amounted to the following:
Per Hour
Partners $ 260
Senior Consultant $ 95
Staff Consultant $ 45
Required:
What will be the effect on company profit related to accepting the Northwood Industries job? What qualitative factors should be considered in the decision as to whether or not to accept the job?