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. Direct costs Direct contract hours worked Corporate Government Total $ 840,000 $3,360,000 $4,200,000 2,700 5,400 8,100 The controller expects indirect costs to total $9.6 million next year. Revenues from Corporate clients are expected to be $2.9 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? Complete this question by entering your answers in the tabs below. Required A Required B 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

Allocation on the basis of Direct cost

		Corporate		Government		Total
1	Direct cost	$       0.84		$          3.36		$             4.20
	Percentage	20	%	80	%	100	%
	Allocation of indirect cost	$       1.92		$          7.68		$             9.60
	Percentage	20	%	80	%	100	%
2	Direct cost	$       0.84		$          3.36		$             4.20
	Allocation of indirect cost	$       1.92		$          7.68		$             9.60
	Total cost	$       2.76		$        11.04		$           13.80
	Fixed fee (Corporate)	$       0.14		-		$             0.14
	Fixed fee (Government)	-		$          1.66		$             1.66
	Total revenue	$       2.90		$        12.70		$           15.60
	Allocation on the basis of	Direct contract hours
		Corporate		Government		Total
1	Direct contract hours	2700		5400		8,100
	Percentage	33.33	%	66.67	%	100	%
	Allocation of indirect cost	$       3.20		$          6.40		$             9.60
	Percentage	$      33.33	%	$        66.67	%	$              100	%
2	Direct cost	$       0.84		$          3.36		$             4.20
	Allocation of indirect cost	$       3.20		$          6.40		$             9.60
	Total cost	$       4.04		$          9.76		$           13.80
	Fixed fee (Corporate)	$      (1.14)		-		$           (1.14)
	Fixed fee (Government)	-		$          1.46		$             1.46
	Total revenue	$       2.90		$        11.22		$           14.12