Reference no: EM132771969
EDF plc is a company that provides management consultancy services to medium-sized organizations. A core staff of full-time consultants are employed but a large number of outside consultants are also employed on short-term contracts. The outside consultants enable the firm to offer a wide range of consultancy services to their clients. However, the full-time consultants are permanent members of staff and will be employed even if there is a temporary decrease in the revenues generated, as their knowledge and experience is crucial. It is known there is some spare capacity in the work-loads of the full-time employees.
When the 2004 budget was prepared, the company's costs and revenues were estimated as: -
Revenue Fees - 40 000 hours at $75 / hour 3 000 000
Costs Full-time consultants (10 consultants at $40 000 per annum) 400 000
Outside consultants (36 000 hours at $50 per hour) 1 800 000
Fixed operating costs 60 000
Fixed Administration costs 640 000
Total costs 2 900 000
Operating profit 100 000
You have been asked you to consider the following questions relating to proposals to improve the company's profit during 2004.
Problem (i) The company has been asked to quote for a consultancy job that will require 20 000 hours of work. As the full-time consultants have spare capacity, they will be able to provide an input to this job of 8 000 hours. This means that the outside consultants will be needed for 12 000 hours. What is the minimum price that could be charged to increase the company's profit by $10 000? Show supportive calculations
Problem (ii) If all fees were reduced to $70 per hour, it is estimated that the demand would increase by 20 000 hours per annum? This would mean that no extra fulltime consultants would be employed but an additional 20 000 hours of outside consultants would be required. Should the company reduce its fees to $70 per hour? Show supportive calculations.