Question

PRIMUS CONSULTING GROUP

Primus is a firm of consultants that focuses on process reengineering and quality improvement initiatives.  Northwood Industries has asked Primus to conduct a study aimed at improving on-time delivery.  Normal practice for Primus is to bill for consultant time at standard rates plus actual travel costs and estimated overhead.  However, Northwood has offered a flat $85,000 for the job.  Currently Primus has excess capacity in that it can take on the Northwood job without turning down other business and without hiring additional staff.

If normal practices were followed, the bill would be:

Classification                                                        Hours                       Rate                            Amount

Partner	100	$250	$25,000
Senior consultant	200	$150	30,000
Staff consultant	200	$80	16,000
Travel costs			15,000
Overhead at $20 per Nonpartner hour			8,000
Total			$94,000

Overhead (computer costs, rent, utilities, paper, copying, etc.) is determined at the start of the year by dividing estimated annual overhead costs ($1,600,000) by total estimated nonpartner hours (80,000 hours).  Approximately 10 percent of the total overhead amount is variable costs.

          All Primus employees receive a fixed annual salary (i.e., there is no compensation for overtime and they are paid monthly, even if they are “on the beach.”).  Annual compensation in the previous year amounted to the following:

                                                                                           Per Hour

                                  Partners                                              $260

                                  Senior consultant                                $  95

                                  Staff consultant                                  $   45

Required

What will be the effect on company profit related to accepting the Northwood Industries job?  What qualitative factors should be considered in the decision as to whether or not to accept the job?          

Answer 1

Answert * To evaluate the effect on company profit related to accepting the northwood industrics. job, we first calculate the primus cost q providing Services to Northewood industries. Partner amount = hours x cost per hour = 100 X 260 = 26000 Senior Consul-lant amount = 200 x 95 = 19000 Stabt consultant amount = 200% 45 = 9000 Traved costs = 15,000 overhead = ( 8920 x 20 3 400xa0 =8000

Total cost of proposal = partner amount + senior consultant +stabb consultant + Travel costs toves head = 26000 +19.000 + 9,000 +15,000 +8,000 = 77,000 .: Total cost de proposal is $77,000. by accepting northwood's offer, prímus will be making a financiał dass = 37,09–85,000 = ($8,000) - however, primus must consider the qualitative : factors such a's idle capacity, before making a decision. => It is given for the case that Primus has grey Capacity and it can provide services to Northwood without biwing odditional stabb. >50, Even if primus will be making a financia) dass by accepting worthwood older, it will still minimize itt doss by utilizing the idle capacity.

- The other qualitative factor is the learning experience, which prinus will acquine by delivering the project: -> O