Question

In: Accounting

Business Case – Manchester Business School (Civil Engineering) The Company (Civil Engineers) consists of two divisions....

Business Case – Manchester Business School (Civil Engineering)

The Company (Civil Engineers) consists of two divisions. The divisions are Transportation and Infrastructure. The company sells engineering services to various customers. The following are the bill rates for the various staff classifications:

Vice President

$250/hour

Senior Engineer

$200/hour

Associate Engineer

$190/hour

Staff Engineer

$160/hour

The two divisions expect to bill the following hours:

  • Transportation - 10,000 hours, vice president at 10% of the time, 20% of Senior Engineer time 10% to Associate engineers and remaining to Staff Engineers.
  • Infrastructure - 6,000 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

$90/hour

Senior Engineer

$70/hour

Associate Engineer

$60/hour

Staff Engineer

$50/hour

The utilization (billable ratio to total hours) for each staff member is as follows:

Vice President

60%

Senior Engineer

80%

Associate Engineer

85%

Staff Engineer

90%

The company has the following other costs:

Admin Salaries

$81,000

Rent

$120,000

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.

Question:

You are an outside third party Human Resources consulting firm and the Manchester Company Board of Directors, CFO and the CPO have engaged your company. The goal of the Board, CFO and the CPO is to improve profitability of the divisions and company. Therefore, to accomplish providing engagement advice to the Board, CFO and CPO the consulting team should answer the following questions during the presentation and in the final report.

  1. Prepare a static budget for the company.
  1. Assume that the actual utilization came in at the following rates:

Vice President

50%

Senior Engineer

82%

Associate Engineer

88%

Staff Engineer

93%

  1. Based on the above utilization, prepare a flexible budget and calculate the Level 2/3 variances.
  1. What recommendations can be made for the upcoming year in budgeting to the CFO for additional profitability and increasing revenue?
  1. What approaches would your recommendations to increase the company overall utilization of staff and billable hours?
  1. How will your recommendations impact customer profitability or divisional profitability?

  1. 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 adding the division.

Solutions

Expert Solution

Billable hours
1) Billable hours for the year: Water Infrastructure Total Utilization ratio (%) Full time Equivalent
Vice President 1000 720 1720 60 2867
(10000*10%) (6000*12%)
Senior Engineer 2000 1200 3200 80 4000
(10000*20%) (6000*20%)
Associate Engineer 1000 300 1300 85 1529
(10000*10%) (6000*5%)
Staff Engineer 6000 3780 9780 90 10867
10000 6000 16000 19263
Full time equivalent = Billable hours/Utilization %. For Vice President it is 1720/60%.
2) Billable hours Amount billed ($)
Total Revenue: Water Infrastructure Billing rate per hour ($) Water Infrastructure Total
Vice President 1000 720 250 250000 180000 430000
Senior Engineer 2000 1200 200 400000 240000 640000
Associate Engineer 1000 300 190 190000 57000 247000
Staff Engineer 6000 3780 160 960000 604800 1564800
10000 6000 1800000 1081800 2881800
Direct Labor costs: Full Time Equivalent (Hrs) Total cost ($)
Water Infrastructure Direct Labor cost per hour ($) Water Infrastructure Total
Vice President 1667 1200 90 150000 108000 258000
Senior Engineer 2500 1500 70 175000 105000 280000
Associate Engineer 1176 353 60 70588 21176 91765
Staff Engineer 6667 4200 50 333333 210000 543333
12010 7253 728922 444176 1173098
INCOME STATEMENT:
Water Infrastructure Total
Revenue 1800000 1081800 2881800
Less: Direct labor 728922 444176 1173098
Gross Margin 1071078 637624 1708702
Overhead costs 182386 109614 292000
(81000+120000+16000+75000) (62.46%) (37.54%)
Net operating income 888692 528010 1416702
3) The overhead cost can be allocated differently as under:
Administration salaries - Direct labor cost
Benefits - Direct labor cost
Rent - Equally
Utilities - Direct labor hours
REVISED INCOME STATEMENT:
Water Infrastructure Total
Revenue 1800000 1081800 2881800
Less: Direct labor 728922 444176 1173098
Gross Margin 1071078 637624 1708702
Gross Margin % 59.5% 58.9% 59.3%
Overhead Costs:
Rent 60000 60000 120000
Utilities 9976 6024 16000
62.35% 37.65%
Administration salaries - Direct labor 50331 30669 81000
62.14% 37.86%
Benefits 46602 28398 75000
62.14% 37.86%
Total overhead costs 166908 125092 292000
Net operating income 904170 512532 1416702
4) Recommendations:
Increase billable ratio among all categories.

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