1. The reason that smaller projects appear to be more profitable is because of the cost drivers that Linda Evans chose to use to allocate the overhead costs. It is unfair to allocate an equal amount of overhead cost to the different kinds of projects, when the smaller projects cost more in days of data collection than the larger reports do. This is especially important to consider because the days of data collection is directly related to the project salaries, which is the cost driver for the allocation of overhead.
600 days/20 projects = 30 days per project
3600 days/100 projects = 36 days per project
2. $640,000/160 trips = $4000 per trip
$370,000/4200 days = $88.095 per day
$390,000/1300 pages = $300 per page
Largest 20 Projects
Smallest 100 Projects
Survey Proposed and Design
50 trips x $4000 per trip = $200,000
110 trips x $4000 per trip = $440,000
Data Collection and Tabulation
600 days x $88.095 per day = $52,857
3600 days x $88.095 per day = $317,142
Analysis and Report Preparation
250 pages x $300 per page = $75,000
1050 pages x $300 per page = $315,000
Largest 20 Projects
Smallest 100 Projects
Profitability per project
(Net Income / # of projects)
Based on our calculations, it’s very clear that larger projects are much more profitable than the smaller projects, mainly because of the allocation of overhead costs. 3. Survey Masters should definitely not take all projects offered to the company because according to our analysis, the larger projects are more profitable than the smaller projects. The calculations in question 2 show that the 20 large projects exceeded the 100 small projects by about 20.54% or $544,286. There is no denying that the company should emphasize more on the larger projects than the smaller projects. If we divide the net income by the number of projects, the large projects average $28,607.15 each versus the small projects averaging $278.57 each. So, by focusing on larger projects, the company’s revenue will be $1,300,000, which leads to $65,000 of revenue per project ($1,300,000/20 large projects). Thus, Survey Master should focus their sales efforts mainly on large projects.
Even though the trips required for a small project is 1.1 trips and for a large project is 2.5 trips and even though large projects require 12.5 pages and small project require 10.5 pages, it is still more profitable to conduct large projects; this is because the collection of data is cheaper in large projects and revenue generation is larger in large projects. However, it is definitely recommended that Survey Master not solely focus on large projects because small projects are also required. For instance, if Survey Master wants to target a new client base, conducting small projects will be more feasible to test the results before investing in the large project. In the future, Survey Master LLC’s strategy should be to select projects that are equal to or greater than $65,000.
4. We previously decided that Survey Master LLC’s future strategy is to select projects that are equivalent to or greater than $65,000. The ratio of small projects to larger is 20:100, reduced to 1:5 (every five projects completed, one large project is completed). If the salaries remain constant, the calculated number of large projects completed within a year is 40. With that, the revenue would yield $2,600,000. Stated within the question is that Survey Masters will, “maintain the level of project salaries at $800,000.”
The calculated overhead expenses for twenty of the largest projects were calculated in question 2. In this problem, we needed an estimate for forty so, we took the numbers for twenty of the largest projects and doubled it to arrive at the overhead expenses for forty. By sticking to larger projects ($65,000), Survey Master LLC’s net income will increase by about 50% ($572,143/$1,144,286). The table below shows the calculations to arrive at the Net Income for 2007.
Projected Income for 2007
Overhead Expenses for 40 Large Projects
(Overhead Expenses for 20 X 2)
If Survey Masters decides to only take large client projects, they must focus on maintaining or reducing their overhead costs. For example, Survey Masters should try to reduce the number of trips required per large projects. Thus, instead of 2.5 trips per large project, they must try and reduce it to 2 trips per large project. Moreover, by focusing solely on large projects, Survey Masters have more time to collect data thus, should be more effective.
Courtney from Study Moose