The law firm END, LLP provides legal services to a wide range of clients in the KC area. The firm has two main costs: (1) compensation for professional staff and (2) all other costs, which include support staff, facilities costs, and other costs.
The costs of professional staff are considered direct costs for the purposes of billing clients and assessing the profitability of each client job; all other costs are considered overhead. The firm determines an overhead rate for client billing based on the number of professional staff hours used for the job. Professional staff are paid $150 per hour and their time is billed at $250 per hour.
The firm estimates the following total costs for the coming year:
Estimated cost of professional staff
$ 6,000,000
(40,000 hours of staff time = $150/hr)
Estimated other costs (overhead)
5,000,000
Total estimated costs
$11,000,000
Required:
Prepare a case analysis that computes the profit on the Zella job - Suppose Zella became a new client of the firm that year and that the job for Zella required I00 hours of professional staff time.
Part A:
Determine the profit END would recognize on the Zella job. [You will need to compute an OH rate to apply to the job – then determine the billing (revenue) and cost of the job.]
Part B:
The CFO of the firm [an OU MBA alum] is not sure that is the most accurate look at the profit of the Zella job and wants to take a closer look at the work involved on the job.
They want to account for differences in cost rates for different levels of professional staff (partners, associates) and for differences in overhead rates for different professional staff levels.
Assume
- partners are billed at $350, and associates are billed at $150
- $3,000,000 of the $6,000,000 total compensation cost estimate is attributed to partners and $3,000,000 is attributed to associates
- $2,000,000 of the $5,000,000 total overhead estimate is attributed to partners and $3,000,000 is attributed to associates
- 10,000 of the estimated 40,000 annual hours of professional time are partner hours and 30,000 are for associates
- 10 of the I00 hours of professional time for the Zella job were partner hours and the remaining 90 hours were associates' time
Determine the profit on the Zella job with this detailed information. Which of the two is better?
