I'm currently taking my first accounting course & am having trouble with an assignment. The assignment is:
DMR Marketing Research is a small firm in Seattle, Washington. On behalf of its clients, the firm conducts focus group meetings, telephone and mail opinion surveys, and evaluations of marketing strategies. The firm has three partners and six nonpartner professionals. At the start of the year, the company estimated a total professional compensation (for the three partners and six nonpartner professionals) to be $1,600,000.
To evaluate the profitability of its engagements, the firm traces actual professional compensation to each engagement along with so-called direct charges. Direct charges consist of travel costs and costs of conducting surveys (e.g., paper and postage). In addition, each engagement receives an allocation of overhead based on professional compensation charges. Overhead consists of all support costs including rent, utilities, and depreciation of office equipment. At the start of the year, these costs were estimated to be $496,000.
Recently, Connie Bachmann, a DMR partner, was asked to conduct a survey for Surenex, a new high-tech company. Connie is excited about this opportunity since she expects that this hot small company will, in three to five years, become a hot big company with premium billing opportunities. At this point, however, Connie wants to quote a low fee since Surenex has cash-flow problem and is clearly unwilling to pay DMR’s normal rates. On most jobs, DMR’s fee is 1.5 times professional compensation. In addition, the company is reimbursed for all out-of-pocket costs related to travel and paper and postage costs for survey. DMR is in high demand, and if it undertakes the Surenex job, it will have to turn down another potential client.
Connie estimates that the Surenex engagement will require the following costs in addition to overhead support costs:
Connie Bachmann (partner), 40 hours at a salary averaging $120 per hour = $4,800
Ambrose Bundy (professional staff). 100 hours at a salary of $40 per hour = $4,000
Direct charges for actual travel, mailing, and postage = $3,000
Total above = $11,800
Required
a. Summarize the situation facing DMR Marketing Research.
b. Calculate the expected full cost of the Surenex engagement, including an allocation of overhead.
c. What is the lowest amount that Connie can bill on this engagement without hurting company profit?
d. In deciding on a price for the engagement, what should Connie consider in addition to the amount calculation in (b)?
The summary is easy enough, but calculating the cost of the Surenex engagement is where I'm getting confused. They give you the direct costs at the end & the total OH costs, but how do you figure out the OH per job since they don't give you an activity to allocate the OH over?
Also, what does the $1,600,000 professional compensation mean? Is it the amount they are planning on paying their employees (3 partners and 6 non partners) over the course of the year? This is the first time I've ran into the term "total professional compensation."
If that's the case, would you divide 1,600,000 by (4,800 + 4000) to get the amount of compensation per job? Then once you have this number, divide it into the OH to get OH per job. Add em all up with the direct charges to get a rough estimate per job then you could see the breakeven point per job & what the minimum they could charge without taking a loss would be?
Sorry if this is incredibly wordy, I'm working through possible solutions as I type this.
Any advice would be greatly appreciated.
DMR Marketing Research is a small firm in Seattle, Washington. On behalf of its clients, the firm conducts focus group meetings, telephone and mail opinion surveys, and evaluations of marketing strategies. The firm has three partners and six nonpartner professionals. At the start of the year, the company estimated a total professional compensation (for the three partners and six nonpartner professionals) to be $1,600,000.
To evaluate the profitability of its engagements, the firm traces actual professional compensation to each engagement along with so-called direct charges. Direct charges consist of travel costs and costs of conducting surveys (e.g., paper and postage). In addition, each engagement receives an allocation of overhead based on professional compensation charges. Overhead consists of all support costs including rent, utilities, and depreciation of office equipment. At the start of the year, these costs were estimated to be $496,000.
Recently, Connie Bachmann, a DMR partner, was asked to conduct a survey for Surenex, a new high-tech company. Connie is excited about this opportunity since she expects that this hot small company will, in three to five years, become a hot big company with premium billing opportunities. At this point, however, Connie wants to quote a low fee since Surenex has cash-flow problem and is clearly unwilling to pay DMR’s normal rates. On most jobs, DMR’s fee is 1.5 times professional compensation. In addition, the company is reimbursed for all out-of-pocket costs related to travel and paper and postage costs for survey. DMR is in high demand, and if it undertakes the Surenex job, it will have to turn down another potential client.
Connie estimates that the Surenex engagement will require the following costs in addition to overhead support costs:
Connie Bachmann (partner), 40 hours at a salary averaging $120 per hour = $4,800
Ambrose Bundy (professional staff). 100 hours at a salary of $40 per hour = $4,000
Direct charges for actual travel, mailing, and postage = $3,000
Total above = $11,800
Required
a. Summarize the situation facing DMR Marketing Research.
b. Calculate the expected full cost of the Surenex engagement, including an allocation of overhead.
c. What is the lowest amount that Connie can bill on this engagement without hurting company profit?
d. In deciding on a price for the engagement, what should Connie consider in addition to the amount calculation in (b)?
The summary is easy enough, but calculating the cost of the Surenex engagement is where I'm getting confused. They give you the direct costs at the end & the total OH costs, but how do you figure out the OH per job since they don't give you an activity to allocate the OH over?
Also, what does the $1,600,000 professional compensation mean? Is it the amount they are planning on paying their employees (3 partners and 6 non partners) over the course of the year? This is the first time I've ran into the term "total professional compensation."
If that's the case, would you divide 1,600,000 by (4,800 + 4000) to get the amount of compensation per job? Then once you have this number, divide it into the OH to get OH per job. Add em all up with the direct charges to get a rough estimate per job then you could see the breakeven point per job & what the minimum they could charge without taking a loss would be?
Sorry if this is incredibly wordy, I'm working through possible solutions as I type this.
Any advice would be greatly appreciated.