Case 7.1 Primus Consulting Group ( LO1 , 2 )
Primus is a firm of consultants that focuses on process re-engineering 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 $75,000 for the job. Currently, Primus has excess capacity so 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
90
$260
$23,400
Senior consultant
125
$160
20,000
Staff consultant
160
$ 90
14,400
Travel costs
21,000
Overhead at $30 per nonpartner hour
8,550
Total
$87,350
Overhead (computer costs, rent, utilities, paper, copying, etc.) is determined at the start of the year by dividing estimated annual overhead costs ($2,400,000) by total estimated nonpartner hours (80,000 hours). Approximately 20 percent of the total amount is variable costs. All Primus employees receive a fixed wage (i.e., there is no compensation for overtime). Annual compensation in the previous year amounted to the following:
Per Hour
Partner
$250
Senior consultant
$150
Staff consultant
$ 80
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 whether to accept the job or not?
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