Greenfield Consultants conducts analyses of public policy issues. The company has two units: Government (with various U. S. government agencies as the only clients) and Corporate (with several corporations as clients). Government business is charged based on the total costs (direct and indirect) plus a 15 percent fee (profit). Corporate clients are charged a fixed fee negotiated at the beginning of the project.
Greenfield Consultants conducts analyses of public policy issues. The company has two units: Government (with various U. S. government agencies as the only clients) and Corporate (with several corporations as clients). Government business is charged based on the total costs (direct and indirect) plus a 15 percent fee (profit). Corporate clients are charged a fixed fee negotiated at the beginning of the project.
During the planning process for the following year, the controller has estimated costs for the two units.
| Corporate | Government | Total | |||||||
| Direct costs | $ | 860,000 | $ | 3,440,000 | $ | 4,300,000 | |||
| Direct contract hours worked | 2,800 | 5,600 | 8,400 | ||||||
The controller expects indirect costs to total $9.9 million next year. Revenues from Corporate clients are expected to be $3.0 million.
Required:
a. Suppose Greenfield chooses to allocate indirect cost based on direct cost.
1. What cost would be allocated to the two units (Corporate and Government)?
2. What total revenue would they expect to collect next year?
b. Suppose Greenfield chooses to allocate indirect cost based on direct contract hours worked.
1. What cost would be allocated to the two units (Corporate and Government)?
2. What total revenue would they expect to collect next year?
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