17.07.2022 - 03:49

# The managing director of a consulting group has the following monthly data on total overhead costs and professional labor hours to bill to clients. Overhead Costs Billable Hours $365,000 3000$400,000

Question:

The managing director of a consulting group has the following monthly data on total overhead costs and professional labor hours to bill to clients.

Overhead Costs: $365,000 ,$400,000,$430,000,$477,000,$560,000,$587,000

Billable Hours :3000 4000 5000 6000 7000 8000

1)Develop a trend line to identify the relationship between billable hours and the overhead costs.

2)Interpret the coefficients of your regression model. Specifically, what does the fixed component of the model mean to the consulting firm?

3)If a special job requiring 1,000 billable hours that would contribute a margin of $38,000 before overhead was available, would the job be attractive? Answers (1) • April 8, 2023 в 16:13 1) To develop a trend line, a linear regression analysis can be performed. Using the given data, the regression equation is: Overhead Costs = 151,164.52 + 0.0516(Billable Hours) This equation shows that for every additional hour of professional labor billed to clients, the overhead costs increase by$0.0516. The intercept of $151,164.52 represents the fixed component of the model, which is the overhead costs that are incurred regardless of the number of billable hours. 2) The fixed component of the model represents the overhead costs that are not related to the number of billable hours. This could include fixed expenses such as rent, utilities, and salaries for non-billable staff. The coefficient of 0.0516 represents the variable component of the model, which is the increase in overhead costs for each additional hour of professional labor billed to clients. 3) To determine if the special job requiring 1,000 billable hours is attractive, we can use the regression equation. Plugging in 1,000 for Billable Hours, we get: Overhead Costs = 151,164.52 + 0.0516(1,000) =$206,764.52 Adding the margin of $38,000, the total revenue from the job would be: Total Revenue =$38,000 + (1000 x Hourly Billing Rate) The hourly billing rate can be calculated by dividing the total revenue by the number of billable hours: Hourly Billing Rate = Total Revenue / Billable Hours Plugging in the numbers, we get: Hourly Billing Rate = ($38,000 + (1000 x Hourly Billing Rate)) / 1000 Simplifying, we get: Hourly Billing Rate =$38 + Hourly Billing Rate Solving for Hourly Billing Rate, we get: Hourly Billing Rate = $38 / (1-1) = Undefined Since the hourly billing rate is undefined, it means that the consulting firm would not be able to cover the overhead costs of the special job with the margin of$38,000. Therefore, the job would not be attractive.
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