Question

The WIX Company Civil Engineers consists of two divisions. The divisions are Water (WA) and Infrastructure (IF). The company sells engineering services to various customers. The following are the bill rates for the various staff classifications: Vice President $280/hour Senior Engineer $220/hour Associate Engineer $200/hour Staff Engineer $160/hour The two divisions expect to bill the following hours: • Water- 12,000 hours, vice president at 15% of the time, 20% of Senior Engineer time 10% to Associate engineers and remaining to Staff Engineers. • Infrastructure- 4,000 hours, vice president at 12% of the time, 20% of Senior Engineer time, 5% to Associate engineers and remaining to Staff Engineers. The Direct Labor costs per hours are as follows: Vice President $99/hour Senior Engineer $77/hour Associate Engineer $62/hour Staff Engineer $53/hour The utilization (billable ratio to total hours) for each staff members are as follows: Vice President 65% Senior Engineer 80% Associate Engineer 85% Staff Engineer 92%. The company has the following other costs: Admin Salaries $181,000 Software $20,000 CEO Salary $150,000 Rent $125,000 Utilities $16,000 Benefits $75,000 Assume that there are 2080 hours per year that each engineer can work including vacation and other benefit hours. You are an outside consulting firm and the company Board and the CFO have engaged you. The goal of the Board and the CFO is to improve profitability of the divisions and company. Therefore, to accomplish that the following questions should be answered during the presentation and the write up. (1). Develop a staffing plan (FTE- Full time equivalent) based on the expected hours to be billed. This means, how many of (Full Time Equivalents) the various staff types should be there to accomplish the set goals and billable hours. (2). Develop an Income Statement budget for the company and the two divisions. All overhead costs can be allocated using percentage of revenues. (3). What can the company do to allocate costs differently to the divisions? Prepare a revised Income statement by division. (4). Calculate the breakeven revenue. (5). Make recommendations to improve profitability. (6). If the company wants to make a profit of $3M how much revenue would it need? (Assuming all costs stay the same including labor)

Answer 1

Answer 1 and Answer 2

Formula	Particulars	Calculations	Total	Vice President	Senior Engineer	Associate Engineer	Staff Engineer
A	Water: Hours of Service			1800	2400	1200	6600
B	Utilization	Given		65%	80%	85%	92%
C=A/B	Total hours required			2769.230769	3000	1411.764706	7173.913043
D=C/2080	No of engineers to be hired			1.331360947	1.442307692	0.678733032	3.448996656
E=D Rounded off	No of engineers to be hired round off			2	2	1	4
F=E*2080	Total labour hours to be paid			4160	4160	2080	8320
G	Bill Rate/hour			280	220	200	160
H	Direct Labour Cost/hour			99	77	62	53
I=A*G	Revenue		2328000	504000	528000	240000	1056000
J=F*H	Labour Cost		1302080	411840	320320	128960	440960
K	Fixed Cost allocated on Revenue basis	=567000*2328000/(2328000+753600)	428341
L=I-J-K	Profit		597579
Formula	Particulars	Calculations	Total	Vice President	Senior Engineer	Associate Engineer	Staff Engineer
M	Infrastructure: Hours of Service			480	800	200	2520
N	Utilization	Given		65%	80%	85%	92%
O=M/N	Total hours required			738.4615385	1000	235.2941176	2739.130435
P=O/2080	No of engineers to be hired			0.355029586	0.480769231	0.113122172	1.316889632
Q=P Rounded off	No of engineers to be hired round off			1	1	1	2
R=Q*2080	Total labour hours to be paid			2080	2080	2080	4160
S	Bill Rate/hour			280	220	200	160
T	Direct Labour Cost/hour			99	77	62	53
U=M*S	Revenue		753600	134400	176000	40000	403200
V=R*T	Labour Cost		715520	205920	160160	128960	220480
W	Fixed Cost allocated on Revenue basis	=567000*753600/(2328000+753600)	138659
X=U-V-W	Profit		-100579

Answer 3

The company can allocate costs based on the Labour Cost incurred. Hence allocating the costs based on Labour cost, we would arrive at the revised income statement as follows:

Particulars	Water	Infrastructure	Total
Labour Cost	1302080	715520	2017600
Fixed Cost allocated (Allocated 567000 in ratio 1302080:715520)	365920	201080	567000
Total Cost	1668000	916600	2584600
Revenue	2328000	753600	3081600
Profit	660000	-163000	497000

Answer 4

Breakeven revunue is somwthing where the total costs is equal to the total revenue and the organisation is in a no profit and no loss situation.

Now breakeven revenue may be computed on different approaches: Marginal approach and Total cost approach.

Let us go through the total cost approach here, being a service industry and the factors are indivisible (human resource). The break even Revenue will be equal to the total cost. Hence breakeven revenue will be as follows for each department and for the organisation as a whole:

Particulars	Water	Infrastructure	Total
Labour Cost	1302080	715520	2017600
Fixed Cost allocated	428341	138659	567000
Total Cost/Break Even Reveue	1730421	854179	2584600

Answer 5

We can see that the profitability is affected majorily due to the Labour cost. Hence I have the following recommendations to improve the profitability:

1. Increase cross skilling amongst the resources of Water and Infrastructure - This will help us the utilise the resources more efficiently and reduce the unutilised/idle time to a great extent. This can help us save on one more employee cost througout the year and help us on cost saving to a great extent.

Suppose we need 1.5 VP in Water and 0.3 VP in Infrastructure, so we will need to hire 2 VP for Water and 1 VP for Infrastructure if there is no cross skilling. But if we develop cross skilling, we can hire just 1.5+0.3=1.8 i.e. 2 VP in total and save the cost of 1 VP for the entire year.

2. Utilise engineers across levels. We can utilise engineers across levels and save on the employee cost to a great extent. For eg: Say we have a requirement of 1.5 VP and 1.4 Senior Engineer. Then we dont need to hire 2 VP and 2 Senior Engineer. We can hire 2 VP and 1 Senior Engineer. The 0.4 Senior Engineer work can be done by the balance 0.5 VP (2-1.5) lying idle.

3. Other Cost reduction techniques can be applied to reduce the fixed costs of the organisation.

4. Go for increase in Sales to ulitilize the idle manhours available in each Division. This will increase revenue at no additional cost (since idle manhours is utilized) and hence the profit will also increase.

Answer 6

Assuming all costs remain same as per above calculations and company wants to make a profit os $3M, then it needs to make $3M over and above its Break even cost today.

Particulars	Amount in $
Break Even Cost today (Stays fixed)	2584600
Profit desired	3000000
Revenue required to make desired profit	5584600