What Will Be The Effect On Company Profit Related To Access ✓ Solved

What will be the effect on company profit related to acce

Primus Consulting Group is a firm that specializes in process re-engineering and quality improvement. Recently, Northwood Industries approached Primus for assistance in improving its on-time delivery. Primus typically charges based on consultant time at standard rates along with actual travel costs and estimated overhead. Northwood has offered a fixed price of $75,000 for the entire project, which poses an interesting dilemma for Primus, especially given its current excess capacity.

To analyze the potential effect on company profit from accepting the Northwood job, we can begin by calculating the total billing according to Primus' standard practices. The billing would consist of costs incurred by the various types of consultants involved in the project, travel costs, and overhead expenses.

Standard Cost Calculation

The breakdown of costs under normal practices is as follows:

  • Partner: 90 hours at $260/hour equals $23,400
  • Senior consultant: 125 hours at $150/hour equals $18,750
  • Staff consultant: 160 hours at $80/hour equals $12,800
  • Travel costs: $21,000
  • Overhead: 285 non-partner hours at $30/hour equals $8,550

Adding all these costs results in a total expense of:

Total = $23,400 + $18,750 + $12,800 + $21,000 + $8,550 = $87,500

Profit Analysis

Given the offered fixed price of $75,000 for the Northwood project, we can assess the effect on profit:

Profit = Revenue - Costs

Using the provided figures:

Profit = $75,000 - $87,500 = -$12,500

This analysis yields a loss of $12,500 if Primus accepts the job at the flat rate offered by Northwood. Thus, from a purely financial standpoint, accepting this job would not be advisable.

Qualitative Factors to Consider

Beyond the quantitative analysis, several qualitative factors should also be taken into account before making a final decision. These include:

  • Reputation and Client Relationship: Building a strong relationship with Northwood may yield future opportunities. Accepting the job might enhance Primus's reputation in the market as a flexible and client-oriented firm.
  • Employee Morale: Taking on a high-profile project may boost employee morale and provide valuable experience for staff members. This can be particularly important in a consulting firm where employee expertise is critical.
  • Market Competition: The current market environment may require Primus to maintain competitiveness by accepting work that does not yield immediate profits but strengthens ties with key clients.
  • Strategic Fit: Evaluate if this project aligns with Primus's long-term strategic goals. Even at a loss, this job might lead to greater business, depending on Northwood's future projects.

Conclusion

Accepting the Northwood Industries job may result in a financial loss but could provide qualitative benefits that may influence long-term prosperity for Primus Consulting Group. Ultimately, the decision should weigh immediate financial impacts alongside strategic advantages for future growth.

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