CASE 7-1 PRIMUS CONSULTING GROUP [LO 1, 2] Primus is a firm of consultants that

Question

CASE 7-1 PRIMUS CONSULTING GROUP [LO 1, 2] 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 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 so 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 90 $260 $23,400 Senior consultant 125 $160 20,000 Staff consultant 160 $ 90 14,400 Travel costs 21,000 Overhead at $30 per nonpartner hour 8,550 Total $87,350 Overhead (computer costs, rent, utilities, paper, copying, etc.) is determined at the start of the year by dividing estimated annual overhead costs ($2,400,000) by total estimated nonpartner 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 Group Classification hours Rate Amount Partner 90 260 23400 SeniorConsultant 125 160 20000 Staff Consultant 160 90 14400 Travel Costs 21000 Overhead @ 30/non-partner hr 8550 Total 87350 Nortwood Costs: Partner 23400 SeniorConsultant 20000 Staff Consultant 14400 Travel Costs 21000 Overhead @ 30/non-partner hr 8550 Total billing 87350 Fixed Overhead 6840 Variable cost of job 80510 Northwood's offer 75000 Loss 5510 Therefore, accepting Northwood's job would result in a loss of $5510 Qualitative aspects: From the data in the question, it appears that all employees of Primus Consulting Group are underpaid. Accepting the Northwood job would result in higher emoluments to employees

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