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 $ 520,000 $2,080,000 $2,600,000 1,100 2,200 3,300 The controller expects indirect costs to total $4.8 million next year. Revenues from Corporate clients are expected to be $1.3 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

a.		Corporate		Government		Total
1	Direct cost	520000		2080000		2600000
	Percentage	20	%	80	%	100	%
	Allocation of indirect cost	960000		3840000		4800000
	Percentage	20	%	80	%	100	%
2	Direct cost			2080000
	Allocated indirect cost			3840000
	Total cost			5920000
	Fixed fee (Corporate)	1300000
	Fixed fee (Government)			888000
	Total revenue	1300000		6808000		8108000
b.		Corporate		Government		Total
1	Direct contract hours	1100		2200		3300
	Percentage	33.33	%	66.67	%	100.00	%
	Allocation of indirect cost	1599840		3200160		4800000
	Percentage	33.33	%	66.67	%	100.00	%
2	Direct cost			2080000
	Allocated indirect cost			3200160
	Total cost			5280160
	Fixed fee (Corporate)	1300000
	Fixed fee (Government)			792024
	Total revenue	1300000		6072184		7372184