Primus is a firm of consultants that focuses on process reengineering and qualit

Question

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

Here is the working of the costs for the project

However on overhead, 20% is variable hence balance 80% is fixed and is going to be incurred irrespective of whether offer from Northwood industries job would be taken or not. Even after removing the fixed overheads from the comparison, the offer price is less than the quoted price of $70,000

Secondly, since it is mentioned that Primus has excess capacity and fixed wage is going to be incurred for the per hour payment to partner and staff, it is worthwhile to calculate the price considering the fixed wage and check

Still it is not a beneficial deal especially considering the project related travel cost of $18,000.

Regarding qualitative factors, it is essential to understand the impact of not taking the order from Northwood and Primus would still be paying the partner and staff on per hour basis. Hence it is also essential to build up the client base with introductory prices and get confidence of Northwood industries. Over the period, Primus should be able to get better prices. Hence it is ok to accept the job.

Hours rate Total Partner 90 $260 $23,400 Sr. Consultant 125 $160 $20,000 Staff Consultant 160 $90 $14,400 Travel Costs $18,000 Total Overhead 285 $30 $8,550 $84,350 Offer price $70,000

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