the homework case starts from page 2

it is an attached doc

\fHolt Consulting: The Case of the Unhappy Sales Force Introduction Harold Holt, the owner and CEO of Holt Consulting, was late arriving to the company's weekly project status review meeting. Lately, he had dreaded these meetings because they nearly always became shouting matches between the sales representatives and the consultants. He was disappointed in the lack of trust between the two parts of his company, but was at a loss about how to improve morale and increase productivity. This week's meeting was no exception. As he entered the conference room, Jane Barnett, a senior sales rep, was complaining that her most recent paycheck was short by over $500 and that it was probably because the Nent-o job was over budget. Jane was the leading complainer among the sales reps. She regularly pointed out that her monthly commission check was less than the estimated commission. Another sales rep, David Morton, chimed in. \"Yes, Jane's right. The consultants always spend too much time on writing reports. And then projects are delivered late and the customers complain.\" Greg Bilton, the consultant assigned to the Nent-o job, retorted \"It's not our fault. You sales reps always promise more than we can deliver and you never budget enough time for projects. If you did a better job of setting customer expectations, then we could meet them.\" Harold spoke up, reminding Jane that \"the reason that you and the other sales reps are paid from actual margins rather than forecast margins is to prevent you from expanding the scope of projects after they are sold and sneaking in extra work to the customers for free.\" After the meeting, Greg grumbled privately to one of his consulting colleagues that \"we would be able to complete jobs on time if we knew which jobs would be coming in and if Harold didn't always pull us off other jobs to work on his projects.\" 10 Holt Consulting Harold Holt had formed Holt Consulting 10 years earlier. The company provided customer satisfaction survey consulting services. Harold had developed a wide network of client contacts, and he generated approximately one third of the company's revenues. The remaining revenues were generated by sales representatives. The company was profitable for the owner, as shown in Exhibit 1. Exhibit 1: Prior Income Statements 20x2 Revenues........................................................................... $2,500,000 Expenses: President's salary........................................................ 150,000 Consultant salaries...................................................... 290,000 Sales representative commissions .............................. 180,000 Other general and administrative salaries................... 135,000 Payroll taxes and employee benefits .......................... 252,000 Survey labor, printing, photocopying, and other direct job costs .............................................. 900,000 Rent, heat, and lights .................................................. 51,000 Miscellaneous office costs.......................................... 45,000 Total expenses ............................................... 2,003,000 Pretax income ................................................ 497,000 Income tax expense @ 20%.............................................. 99,400 Net income .................................................... $ 397,600 20x1 $2,000,000 150,000 270,000 200,000 130,000 231,000 700,000 50,000 40,000 1,771,000 229,000 45,80 0$ 183,200 Project Pricing and Sales Commissions All sales reps were responsible for writing their own proposals, although they could ask the consultants for technical assistance as needed. The sales reps were responsible for calculating the estimated cost and for setting the price for projects. After a proposal was accepted, the sales reps turned each project over to a consultant to do the actual work. The sales reps usually set the price at 320% of the estimated direct consulting labor cost plus 125% of the other direct costs (such as survey labor and photocopying). The estimated direct consulting labor cost was calculated by multiplying the estimated consulting hours by a standard labor rate. A standard rate of $25 per hour was used for senior consultants, and a $20 rate was used for junior consultants. The sales force was paid on straight sales commission. The commission was equal to 24% of the difference between the price paid for a project by the client and the actual total direct costs of the project. After a project was complete, the actual labor hours were totaled and the actual direct consultant labor cost was calculated by multiplying actual hours times the labor rate. Other direct costs were also accumulated for the job. Then the sales rep's commission was calculated and paid. Exhibit 2 (on the next page) provides estimated cost, price, and commission information for a potential new job. 11 Exhibit 2: Potential New Job One of the sales representatives developed the following information for a potential new consulting engagement. Estimated consultant cost: Senior consultant Junior consultant Total 10 hours @ $25 per hour $ 250 20 hours @ $20 per hour 400 $ 650 Estimated other direct job costs: Survey labor (outsourced) 50 Total $1,000 Photocopying of final report (outsourced) $1,050 Estimated price: Consultant cost Other direct costs Total $650 x 320% $1,050 x 125% $2,080 1,313 $3,393 Estimated sales commission ($3,393 - $650 - $1,050) x 24% $ 406 Consultants and Time Records Unlike the sales reps, the consultants were all paid a straight salary with no overtime and no bonus. Holt Consulting used a job costing system that required consultants to record their time in 0.25 hour (15-minute) increments. Each project was assigned a job code and each task (survey design, data collection, report writing, proofreading, and copying and binding) was assigned a task code. The standard consultant labor rate was equal to the average consultants' annual salaries divided by theoretical capacity of 2,080 hours per year (standard work week of 40 hours times 52 weeks per year). Exhibit 3 provides average consultant time records from 20x2. Exhibit 3: Average Consultant Time During 20x2 Time charged to jobs Time charged to internal marketing Holidays and sick leave Vacation Total hours (52 weeks x 40 hours per week = 2,080 hours) Senior 1,500 410 110 60 2,080 Junior 1,000 960 100 20 2,080 12 VP of Finance Concerns Ben Smith, the vice president of finance, had two major concerns about the current system for sales representatives and consultants. First, Ben noticed that some of the sales reps often brought in relatively small jobs. He wondered whether these small jobs were worth the resources devoted to them. He decided to talk with Harold about setting a minimum price on all jobs. Second, Ben found that the consultants billed nearly half of their time to job code 0001 \"Internal Marketing\" (see Exhibit 3). This job code was used for all marketing activities, including time spent helping the sales reps on proposals. However, he suspected that the senior and junior consultants did not assign equivalent work to this job code. Specifically, he believed that the sales reps preferred to ask the senior consultants for help when writing proposals, to increase the chance of winning the bid. He also suspected that the sales reps had been pressuring the junior consultants to bill some of the time spent on projects as \"Internal Marketing\" to avoid exceeding the time budget on projects. Junior consultants often took longer to complete a project than the senior consultants. Since consultant performance was evaluated based on meeting budgets, the junior consultants generally complied with a sales rep's request. Ben planned to recommend a revised time reporting system. Under the new system, consultants would not be permitted to charge time to \"internal marketing.\" Instead, they would charge their time separately to \"job proposals\" and to \"unbillable time.\" The \"unbillable time\" category would include time spent in departmental meetings, training courses, and other activities that cannot be traced to jobs. In addition, each consultant's time records would be submitted to a new consulting manager, who would review and approve them. The consultants would be pressured to accurately report how their time is spent. Ben estimated the average consultant time under the new system as shown in Exhibit 4. Exhibit 4: Estimated Average Consultant Time Under Proposed Time Reporting System Time charged to jobs Time charged to job proposals Unbillable time Holidays and sick leave Vacation Total hours Senior 1,500 330 80 110 Junior 1,720 40 200 100 60 20 2,080 2,080 13 Required: Answer the following questions (1-22) in the space provided. Cost Allocation 1. What types of overhead costs did the company incur? Should the accounting system be modified to allocate overhead to individual jobs? As you answer this question, consider how allocated overhead cost information might be used. 2. Discuss whether activity-based costing (ABC) would be useful for Holt. 14 3. What are the limitations of the ABC method compared to the more traditional method/s for Holt? Comprehensively explain your answer in the space provided below, and ensure that you refer to Economic Darwinism in your answer. 15 Pricing 4. Discuss whether the company's pricing policy should be changed. In your discussion, consider the basis that should be used to set prices and who should be responsible for pricing decisions. The New Job 5. Suppose the potential new job shown in Exhibit 2 is from a large company. The sales representative believes that this could become a very profitable client if its managers are pleased with the work performed. Therefore, the sales representative would like to charge as low a price as possible to increase the likelihood of getting this job. Using the general quantitative decision rule, calculate and explain the lowest price that would be acceptable for this job. Assume that the consultants do not have any idle time (i.e., consulting time is a 'constrained' or limited resource). 16 Opportunity Costs 6. The VP of finance recommends that a senior consultant assume responsibility for coordinating the consultants' job scheduling, reviewing and approving time records, and supervising the work of junior consultants. Suppose these activities would require approximately 500 hours per year that would otherwise be charged to jobs at the company's standard price. Estimate the annual opportunity cost of this recommendation. Incentives 7. What were the incentives and likely behavior of the sales reps under the existing accounting system? Should the sales rep commissions be based on the difference between the price and the ex-post (i.e., actual) consulting labor cost? 17