In: Accounting
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:
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 |
$75,000 |
Assume that there are 2080 hours per year that each engineer can work including vacation and other benefit hours.
Question:
You are an outside third party Human Resources consulting firm and the Manchester Company Board of Directors, CFO and the CPO have engaged your company. The goal of the Board, CFO and the CPO is to improve profitability of the divisions and company. Therefore, to accomplish providing engagement advice to the Board, CFO and CPO the consulting team should answer the following questions during the presentation and in the final report.
Vice President |
50% |
Senior Engineer |
82% |
Associate Engineer |
88% |
Staff Engineer |
93% |
Billable hours | ||||||
1) Billable hours for the year: | Water | Infrastructure | Total | Utilization ratio (%) | Full time Equivalent | |
Vice President | 1000 | 720 | 1720 | 60 | 2867 | |
(10000*10%) | (6000*12%) | |||||
Senior Engineer | 2000 | 1200 | 3200 | 80 | 4000 | |
(10000*20%) | (6000*20%) | |||||
Associate Engineer | 1000 | 300 | 1300 | 85 | 1529 | |
(10000*10%) | (6000*5%) | |||||
Staff Engineer | 6000 | 3780 | 9780 | 90 | 10867 | |
10000 | 6000 | 16000 | 19263 | |||
Full time equivalent = Billable hours/Utilization %. For Vice President it is 1720/60%. | ||||||
2) | Billable hours | Amount billed ($) | ||||
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. |