T. Q. Jones is the manager of a machine design department in a large corporation. His engineers and designers charge their internal corporate clients on an hourly basis at $50 per hour. This represents the department’s average cost for an hour’s labor based on full capacity. Each engineer is assumed to have 1,800 billable hours per year. The $50 per hour is the sum of all the salaries and benefits divided by the product of 1,800 hours and the number of salaries in the numerator. The $50 per hour charged to users is the same regardless of the pay, position, or skill level of the engineer/designer assigned to the job. All large jobs (those in excess of $50,000) are estimated and contracted for up front, but in the past clients had no recourse except to continue paying if estimates were exceeded.
Recent competitive pressures on the entire corporation have caused many of T. Q.’s clients to seek competitive bids from outside the firm. T. Q.’s department has found itself sitting idle while outside design firms are awarded contracts.
T. Q. claims that he is being treated unfairly because he has no choice but to charge a higher price. Many times his most skilled and senior people spend their time assisting clients in establishing equipment requirements and investigating technology alternatives, only to find the bulk of the job farmed out to a small design firm that charges $30 per hour once critical design and technical decisions are made.
Required:
Critically evaluate this situation and list major issues as well as possible solutions.
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