Refer to the Sunflower Data Set.
1. Compute Sunflower's indirect cost allocation rate.
2. Compute the total costs assigned to the Wilson and Nanry engagements.
3. Compute the operating income from the Wilson and Nanry engagements.
Sunflower, Inc., is a technology consulting firm focused on the development and integration of cloud computing applications with client websites. President Susan Schnell's ear is ringing after an unpleasant call from client John Wilson. Wilson was irate after opening his bill for Sunflower's redesign of his company's website. Wilson said that Sunflower's major competitor, Zeta Applications, charged much lower fees to another company for which Wilson serves on the board of directors.
Schnell is puzzled for two reasons: First, she is confident that her firm knows website design and support as well as any of Sunflower's competitors. Schnell cannot understand how Zeta Applications can undercut Sunflower's rates and still make a profit. But Zeta Applications is reputed to be very profitable. Second, just yesterday Schnell received a call from client Ray Nanry. Nanry was happy with the excellent service and reasonable fees Schnell charged him for adding a database-driven-job-posting feature to his company's website. Schnell was surprised by Nanry's compliments because this was an unusual job for Sunflower that required development of complex data management and control applications, and she had felt a little uneasy accepting it.
Like most consulting firms, Sunflower traces direct labor to individual engagements (jobs). Sunflower allocates indirect costs to engagements using a budgeted rate based on direct labor hours. Schnell is happy with this system, which she has used since she established Sunflower in 1995.
Schnell expects to incur $710,500 of indirect costs this year, and she expects her firm to work 4,900 direct labor hours. Schnell and the other system consultants earn $335 per hour. Clients are billed at 160% of direct labor cost. Last month, Sunflower's consultants spent 95 hours on Wilson's engagement. They also spent 95 hours on Nanry's engagement.