PRIMUS CONSULTING GROUP Primus is a firm of consultants that focuses on process

Question

PRIMUS CONSULTING GROUP Primus is a firm of consultants that focuses on process reengineering and quality improvement initiatives. Northwood industries have 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 cost and estimated overhead. However, Northwood has offer a flat $70,000 for the job. Currently, Primus has excess capacity so it can take on the Northwood job without turning other business and without hiring additional staff. If normal practices were followed, the bill would be: Classification Hours Rate Amount Partner 90 $260 $23,400 Senior consultant 125 $160 20,000 Staff consultant 60 $ 90 14,400 Travel costs 18,000 Overhead at $30 per non-partner hour 8,500 Total $84,350 Overhead (computer cost, rent, utilities, paper, copying etc.) is determined at the start of the year by dividing estimated annual overhead cost ($2,400,000) by total estimated non-partner hours (80,000 hours). Approximately 20 percent 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 Partner $250 Senior consultant $150 Staff consultant $ 80 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 whether to accept the job or not?

Explanation / Answer

Primus Consulting Details Amt $ Revenue from Nortwood Job=              70,000 Salaries Not relevant as no additional cost involved                       -   Travel cost -relevant as actual additional expense              18,000 Overhead -Fixed Part not relevant (80%)                       -   Overhead-variable 20% -relevant as will be additional cost =                1,700 Net Profit Increase considering surplus capacity and fixed wages without additional staff hirirng for the job              50,300 Therefore the job may be accepted

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