Question

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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 $ 580,000 $2,320,000 $2,900,000 Direct contract hours worked 1,400 2,800 4,200 The controller expects indirect costs to total $5.7 million next year. Revenues from Corporate clients are expected to be $1.6 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

E חד A B С Expected total indirect cost D $5,700,000 1 N 3 4 Corporate Government Total Direct costs $580,000 $2,320,000 $2,900,000 Allocated indirect costs $1,140,000 $4,560,000 $5,700,000 TOTAL $1,720,000 $6,880,000 $8,600,000 5 6 7 8 9 Corporate Government Total $1,600,000 $7,912,000 $9,512,000 Revenue 10 11 a) 1) 12 Corporate Government Allocated indirect costs $1,140,000 $4,560,000 13 14 15 2) Expected total revenue = $9,512,000 16

A B с D E Expected total indirect cost 5700000 w N E Total 4 2900000 Corporate 580000 =(C4/E4)*D1 =C4+C5 Direct costs Allocated indirect costs TOTAL Government 2320000 =(D4/E4)*D1 =D4+D5 5 6 5700000 =E4+E5 7 8 Total Corporate 1600000 Government =D6+D6*15%) 9 Revenue =C9+D9 10 11 a) 1) 12 Corporate Government Allocated indirect costs 1140000 4560000 13 14 15 2) Expected total revenue = $9,512,000 16

F Сл А B C D E 1 Expected total indirect cost $5,700,000 2 Corporate Government Total 3 Direct contracts hours worked 1,400 $2,800 4,200 4 5 Corporate Government Total 6 Direct costs $580,000 $2,320,000 $2,900,000 7 Allocated indirect costs $1,900,000 $3,800,000 $5,700,000 8 TOTAL $2,480,000 $6,120,000 $8,600,000 9 10 Corporate Government Total 11 Revenue $1,600,000 $7,038,000 $8,638,000 12 13 b) 1) Corporate Government Allocated indirect $1,900,000 $3,800,000 15 costs 16 17 2) Expected total revenue = $8,638,000 18 14

А C D E F B Expected total indirect cost 1 2 Corporate 5700000 Government 2800 Total 3 Direct contracts hours worked 1400 4200 4 5 Total 6 Corporate 580000 =(C3/E3)*D1 =C6+C7 Direct costs Allocated indirect costs TOTAL Government 2320000 =(D3/E3)*D1 =D6+D7 7 2900000 5700000 =E6+E7 8 9 10 Corporate Total Government =D8+(D8*15%) 11 Revenue 1600000 =C11+D11 12 13 b) 1) 14 Corporate Government Allocated indirect costs 15 1900000 3800000 16 17 18 2) Expected total revenue = $8,638,000