6/10 Question 4: (15 points) Wendy is a partner of Discovery Ltd, a leading IT consulting firm in Hong Kong. The budget of Discovery for the upcoming year is presented as follows: Budgeted Item Revenue Amount $7,797,000 Direct labor (150,000 hours* $20 per hour) $3,000,000 Employee benefits $1,200,000 Travel $900,000 Materials $500,000 Material handling and installation $50,000 Overhead $1,130,000 Pre-tax income $1,017,000 As reflected in the budget, Discovery generally desires a pre-tax income equal to 15% of cost. Below is the description of the key budgeted items: 1. 2. 3. 4. 5. 6. Direct labor covers the wage cost of consultants who work on specific client projects. Discovery charges this cost to clients based on the number of direct labor hours worked on the project multiplied by the hourly wage. Employee benefits represent the cost of benefits provided to consultants, including medical and dental insurance, mandatory contrition, social security tax, and paid leaves. This cost is charged to client as a percentage of direct labor charged to the project. Travel includes the cost incurred during consultants' trips to the client sites, including transportation, food, and lodging, etc. This cost is charged to clients as a percentage of direct labor charged to the project. Materials represent the cost of materials purchased by Discovery for use on client projects, including various hardware and software components. Discovery directly charges this cost to the specific clients. Material handling and installation cover the cost incurred to make the materials readily available for use on client projects, including storage, delivery, setup, and installation of hardware or software components. This cost is charged to clients as a percentage of the material cost. Overhead includes (1) the salaries and wages paid to employees who do not directly work on client projects such as administrative, accounting, and legal staff; (2) other costs incurred at the corporate level. Most of the overhead is fixed cost. Overhead is 6 charged to clients as a percentage of all other costs incurred on the project. The compensation of partners at Discovery including Wendy is determined on the basis of their ability to earn the desired pre-tax income as 15% of cost for each client project done. Required: (a) PolyU, a new client of Discovery, contacted Wendy to ask for a price quote for a project related to PolyU's e-library system. According to Wendy's estimation, this project would require 5,000 hours of direct labor and materials costing $50,000. The amounts of other cost items and desired pre-tax income would be determined on the basis of the respective percentages inherent in the budget. What is the amount of the price quote that Wendy should provide to PolyU on this project? Please show your work. (8 points) (b) Three days after receiving the price quote, PolyU called Wendy again to ask if she would be willing to accept a price of $265,000. Identify the factors that Wendy should consider in deciding whether to accept this offer. Please limit your answer to 250 words. (7 points)