Question

Question 8: Short case/analysis problem

You have started a small business providing professional consulting services for companies wanting to develop business analytics capabilities to improve their own business practices and performance. Things have been going quite well. In the last year you were able to "sell" 90% of your billable time at $95/hour. You spent 10% of your time on business development activities, mostly meeting with prospective clients. You ended up making approximately $140,000 after deducting your overhead expenses. You worked from home, so these were very low.

You are considering the following scenario.

You find that in your work 3/4 of your billed time is spent on analysis, and about 1/4 is spent on "consulting" and interfacing with your clients. You feel that you could significantly leverage your time if you hire two analysts. This way you could spend more time concentrating on the more value-adding component of your work - Consulting.

You are confident that you can bill your time at $120/hour. You recognize that you would need to spend more time managing the company and ensuring a constant stream of work. You estimate that you would only be able to bill 65% of your billable hours. The analysts would absorb the rest of what happens behind the scenes. You are confident that you can bill $68/hour for the analysts' time. In total this should allow you to bill $363,968 per year.

A quick review of labor data indicates that you should be able to hire the analysts for $60,000 per year, to which you would need to add 30% for benefits. You expect that you should be able to bill 85% of their time, with the remainder of their time being taken up with travel, reporting requirements, and being "between projects".

You recognize that your overhead structure will change. You collect the following data:

• The contracts that you will be pursuing require you to have a physical office location. You will therefore need office space. You find that a 1000 sqft suite will rent for $21/sqft per year in downtown Norfolk.

• Communications and internet will cost $300/month for phones and $160/month for internet

• Office supplies will come to $500/month

• Travel will cost $500/month for yourself, and $150/month for each analyst

• Marketing and sales expenses will amount to $1000/month

There will be a general management and administration requirement. You intend to execute this function personally. Your target is to have your pay increase from $140,000 to $160,000 by combining the direct pay for consulting and receiving pay for executing the G&A activities.

Provide an analysis of the scenario.

Estimate the direct labor cost for the analysts.

Estimate the overhead (excluding G&A)

Estimate the permissible overhead including G&A if the direct labor rate for consulting is $100/hr.

Using the billed direct labor hours as your cost driver, allocate the overhead to the analyst and consultant costs (rates). Do these calculated billing rates come close to the rates that you feel you can charge your customers?

If your billed rates remain close to $120/hr for consulting and $68/hr for analyst time, will you be able to increase your income to $160,000 per year?

Answer 1