Question

Greenfield Consultants conducts analyses of public policy issues. The company has two units: Government (with various U. S. government agencies as the only clients) and Corporate (with several corporations as clients). Government business is charged based on the total costs (direct and indirect) plus a 15 percent fee (profit). Corporate clients are charged a fixed fee negotiated at the beginning of the project. During the planning process for the following year, the controller has estimated costs for the two units. Corporate Government Total Direct costs $ 900,000 $ 3,600,000 $ 4,500,000 Direct contract hours worked 3,000 6,000 9,000 The controller expects indirect costs to total $10.5 million next year. Revenues from Corporate clients are expected to be $3.2 million. Required: a. Suppose Greenfield chooses to allocate indirect cost based on direct cost. 1. What cost would be allocated to the two units (Corporate and Government)? 2. What total revenue would they expect to collect next year? b. Suppose Greenfield chooses to allocate indirect cost based on direct contract hours worked. 1. What cost would be allocated to the two units (Corporate and Government)? 2. What total revenue would they expect to collect next year?

Answer 1

Answer with working notes is given below

Direct Cost Percentage Allocation of indirect cost Percentage Corporate Government $900,000 $3,600,000 80% $2,100,000 $8,400,000 20% 80% Total $4,500,000 100% $10,500,000 100% $3,600,000 $8,400,000 $12,000,000 Direct Cost Allocated indirect Cost Total Cost Fixed Fee (Corporate) Foxed fee (Government) Total Revenue $3,200,000 $13,800,000 $13,800,000 $3,200,000 $17,000,000 Government business-pricing Total cost $12,000,000 Margin at 15% $1,800,000 Total Revenue $13,800,000 2) Total Revenue Expected $17,000,000 b) 6,000L Direct Contract labor hours Percentage 1) Allocation of indirect cost Percentage Corporate Government 3,000 33.33% 66.67% $3,500,000 $7,000,000 33.33% 66.67% Total $9,000 100.00% $10,500,000 100.00% $3,600,000 $7,000,000 $10,600,000 Direct Cost Allocated indirect Cost Total Cost Fixed Fee (Corporate) Foxed fee (Government) Total Revenue $3,200,000 $12,190,000 $12,190,000 $3,200,000 $15,390,000 Government business-pricing Total cost $10,600,000 Margin at 15% $1,590,000 Total Revenue $12,190,000 2) Total Revenue Expected $15,390,000