| a. | Calculate the expected full cost of the Surenex engagement for YSL Marketing Research: |
| | | | |
| | Step 1, calculate the Overhead (O/H) rate (based on annual totals): | |
| | Annual Overhead (rent, utilities, equip deprec'n) | | Notice that these are all fixed costs |
| | Annual Total Prof. Compensation (base for rate) | | See first paragraph. |
| | Overhead rate | | O/H rate = O/H$ / Allocation base $ |
| | | | |
| | Step 2, calculate cost for Surenex engagement | | |
| | Labor (Connie + Ambrose) | | |
| | Overhead (O/H rate x labor $) | | |
| | Direct Charges (travel, mail, etc) | | |
| | Total | | |
| b. | What is the lowest amount Connie can bill without hurting company profit? |
| | Step 1, determine the incremental cost only | | |
| | Labor (Connie + Ambrose) | | |
| | Direct Charges (travel, mail, etc) | | |
| | Total | | |
| | | | |
| | Step 2, determine the opportunity cost (sales given up) | |
| | Labor (Connie + Ambrose) | | |
| | | | |
| | Price (above labor times 1.5x billing rate): | | Note that labor and overhead and profit are covered in this billing rate. |
| | plus direct charges | | |
| | Total "Opportunity cost" (other sales option) | | Note: this is the normal price that would have been charged to Surenex or any company for the same size of job. |
| | | | |
| | Answer: the larger of these two amounts: | | is the lowest amount to bill without "hurting" company profits |
| | | | |
| c. | In deciding a price, what else should Connie consider in addition to the amount from "b.". |
| | Hint: this is not a calculation, read what was said about Surenex. Training from your Marketing class comes in here. |
| | |
| |
