Question

 

The WIX Company Civil Engineers consists of two divisions. The divisions are Water and Waste Water. The company sells engineering services to various customers. The following are the bill rates for the various staff classifications:

Vice President $200/hour

Senior Engineer $180/hour

Staff Engineer $150/hour.

The two divisions expect to bill the following hours:

Water- 10000 hours, vice president at 10% of the time, 30% of Senior Engineer time and remaining to Staff Engineers.

Waste Water- 6000 hours, vice president at 20% of the time, 20% of Senior Engineer time and remaining to Staff Engineers.

The Direct Labor costs per hours are as follows:

Vice President $80/hour

Senior Engineer $60/hour

Staff Engineer $40/hour.

The utilization for each staff members are as follows:

Vice President 60%

Senior Engineer 80%

Staff Engineer 90%.

The company has the following other costs:

Admin Salaries $90,000

Rent $100,000

Utilities $6,000

Benefits $76,000

Assume 20% of time for each staff member includes vacation and sick time. 2080 is the annual total work hours.

Project Part II:

(1). Prepare a static budget for the company.

(2). Assume that the actual utilization came in at the following rates:

VP-50% Senior-82% Staff-93%

Based on the above utilization, prepare a flexible budget and calculate the Level 2/3 variances.

(3). What recommendations can be made for the upcoming year in budgeting to the CFO for additional profitability and increasing revenue?

(4). What approaches would your recommendations to increase the company overall utilization of staff and billable hours?

(5). How will your recommendations impact customer profitability or divisional profitability?

(6). The company wants to add a new division. It will be the Construction Division with 3 people. Please discuss pros and cons of adding a division and when you might consider not to add the division.

Answer 1

A.Static Budget for the company:

	Water	Waste
Vice president	1,000	1,200
Senior Engineer	3,000	1,200
Staff Engineer	6,000	3,600
Billing Hours	10,000	6,000
Revenue
Vice president Billed amount	2,00,000	2,40,000
Senior Engineer billed amount	5,40,000	2,16,000
Staff Engineer billed amount	9,00,000	5,40,000
Total Revenue	16,40,000	9,96,000
	26,36,000
Costs
Vice president cost	79,872.00
Senior Engineer Cost	79,872.00
Staff Engineer Cost	59,904.00
Total Direct cost	2,19,648.00
Admin Salaries	90,000.00
Rent	1,00,000.00
Utilities	6,000.00
Benefits	76,000.00
Total Cost	4,91,648.00
Profit	21,44,352.00

2. Flexible Budget

There will not be any change in revenue as the billing hours will remain same. Only change will be in the direct cost because of variance in the actual utilization of engineers as compared to budgeted hours. Also, there is no change in any rate of revenue or cost.

	Water	Waste
Vice president	1,000	1,200
Senior Engineer	3,000	1,200
Staff Engineer	6,000	3,600
Billing Hours	10,000	6,000
Revenue
Vice president Billed amount	2,00,000	2,40,000
Senior Engineer billed amount	5,40,000	2,16,000
Staff Engineer billed amount	9,00,000	5,40,000
Total Revenue	16,40,000	9,96,000
	26,36,000
Actual Costs
Vice president cost	66,560.00
Senior Engineer Cost	81,868.80
Staff Engineer Cost	61,900.80
Total Direct cost	2,10,329.60
Admin Salaries	90,000.00
Rent	1,00,000.00
Utilities	6,000.00
Benefits	76,000.00
Total Cost	4,82,329.60
Profit	21,53,670.40

3. Recommendation to CFO:

	Water	Waste
Vice president	1,000	1,200
Senior Engineer	3,000	1,200
Staff Engineer	6,000	3,600
Billing Hours	10,000	6,000
Revenue
Vice president Billed amount	2,00,000	2,40,000
Senior Engineer billed amount	5,40,000	2,16,000
Staff Engineer billed amount	9,00,000	5,40,000
Total Revenue	16,40,000	9,96,000
	26,36,000
Per hour revenue of billed hours	164	166

Considering per hour revenue from Waste division is more than Water division, we should try to operate more on Waste division.