a. Calculate the expected full cost of the Surenex engagement, including an allocation of overhead.
b. What is the lowest amount that Connie can bill on this engagement without hurting company profit?
c. In deciding on a price for the engagement, what should Connie consider in addition to the amount calculated in (b)?
YSL Marketing Research is a small firm located in Seattle, Washington. On behalf of its clients, the firm conducts focus group meetings, telephone and mail opinion surveys, and evaluations of marketing strategies. The firm has two partners and six nonpartner professionals. At the start of the year, the company estimated total professional compensation (for the three partners and six nonpartner professionals) to be $1,600,000.
To evaluate the profitability of its engagements, the firm traces actual professional compensation to each engagement along with so-called direct charges. Direct charges consist of travel costs and costs of conducting surveys (e.g., paper and postage). In addition, each engagement receives an allocation of overhead based on professional compensation charges. Overhead consists of all support costs including rent, utilities, and depreciation of office equipment. At the start of the year, these costs were estimated to be $480,000.
Recently, Connie Bachmann, a YSL partner, was asked to conduct a survey for Surenex, a new hightech company. Connie is excited about this opportunity since she expects that this hot small company will, in three to five years, become a hot big company with premium billing opportunities. At this point, however, Connie wants to quote a low fee since Surenex has cash-flow problems and is clearly unwilling to pay YSL’s normal rates. On most jobs, YSL’s fee is 1.5 times professional compensation. In addition, the company is reimbursed for all out-of-pocket costs related to travel and paper and postage costs for surveys. YSL is in high demand, and if it undertakes the Surenex job, it will have to turn down another potential client.
Connie estimates that the Surenex engagement will require the following costs in addition to overhead support costs:
Connie Bachmann (partner), 40 hours at a salary averaging $200 per hour = $8,000.
Ambrose Bundy (professional staff), 100 hours at a salary of $60 per hour = $6,000.
Direct charges for actual travel, mailing, and postage = $3,000.
Total of above = $17,000.