Solution of Case YSL Marketing Research.
YSL Marketing Research is a small firm conducts focus group meetings and mail opinion surveys. The YSL’s partner Connie Bachmann has been asked to conduct a survey for Surenex that has the potential to be a valued long-run client. And the firm willing to pay YSL’s normally billing rates.
2.0 Answer the question (a)
The full cost of the Surenex engagement including indirect costs and direct costs. Direct costs consist of travel cost and cost of conducting surveys. In the case, direct cost means direct charge is about $3,000. The professional compensation charges include partner $4,800 and professional staff $4,000. Each of engagement receives an allocation of overhead based on professional compensation charges. The data of estimated total professional compensation and overhead respectively are $1,600,000 and $496,000. According to OAR= total estimated OH cost/ total estimated professional compensation charges.
Estimated overhead $496,000
Estimated professional compensation $1,600,000
Overhead rate 0.31
Job cost summary of Surenex engagement $ $
Direct charges 3,000
Professional compensation charges
Partner salary(40 hours×$120) 4,800
Staff salary(100 hours×$40) 4,000 8,800
Full cost 14,528
Based on above calculate OAR is about 0.31. The full cost includes profession charges, direct charges and overhead cost. The expected full cost of the Surenex engagement is about $14,528 ($3,000+$8,800+$2,728).
3.0 Answer the question (b)
Every research company wants to conduct research at higher prices than the cost of research. The company profit equals to the sales revenue minus the costs. YSL marketing research is a small firm that bidding on a job and is considering various costs. The question requires calculate the lowest prices that Connie can bill on this engagement without hurting company profit means that what is the lowest charge of YSL.
From the question (a) the full cost $14,528 is not the lowest amount that Connie pay and also is not the variable cost of the job. There are three types of costs. The mixed cost is a cost that carries both the elements of the fixed and variable costs such as utilities. Fixed costs usually include rent and lease payments. Variable costs change in relation to a company’s activities.
YSL marketing research is a service company not a manufacture company. From the case it is not clearly told which costs are fixed and which costs are variable. So we assume the variable costs are employees’ salaries, direct charges and administrative expense. According to Sales – VC – FC = Profit and calculate the company profit.
Based on the fact, we must consider opportunity cost. Opportunity cost means that in order to get some things have to give up the greatest value of some other things. When YSL face Surenex engagement and other jobs, then YSL make decision to undertake one job among these, the highest value of the abandoned option is the opportunity cost of this decision.
In this case, on most jobs, YSL’s fee is 1.5 times professional compensation. In addition, the company is reimbursed for all out-of-pocket costs ($3,000). If company undertakes the Surenex job, it will miss out on billing $13,200(1.5 x $8,800) some other job and will have to turn down another potential client.
If YSL reject Surenex it can charged 1.5times professional compensation plus out-of-pocket costs of other jobs. In order to avoid hurting profit, the company must cover out of pocket costs ($3,000). Thus, the lowest amount that Connie can bill is $16200 ($13,200+$3,000). The lowest amount that Connie can bill calculation
Direct charge 3,000
Partner salary 4,800
Staff salary 4,000
1.5 times professional compensation 8,800
(1.5 x 8,800) 13,200
4.0 Answer the question (c)
This question requires we find out some aspects that we did not consider in previous analysis. Surenex is a new high-tech company that may end up being a large hot company with premium billing opportunities in three to five years. To build cooperation relationship with Surenex is good for YSL long-term development, but also the company need to take a certain risks.
From the case, we know on the most jobs, the normal rate is 1.5 times of YSL’s fee. But Connie wants to quote a low fee since Surenex has cash-flow problems. In other words, the company may give a discount for example 1.4 times fee or lower charge for Surenex. There are two aspects to analysis.
In short-term, YSL may loss profit to undertake this engagement and give up bid 1.5 times compensation on other jobs. And YSL need reject other potential clients that may reduce the goodwill of the company. YSL is in high demand; it may miss some good opportunities.
But YSL may be better off in the long-run, even it setting a relatively low price on the current job. If this engagement success, YSL can get a long-term and fixed income from establish cooperation relationship with Surenex. According to the forecast, Surenex may become a big hot company, there are many advantages for the development of YSL, such as improve company visibility. Therefore, even a price that does not cover salaries and direct charges could be warranted if the prospect for future profit, from working for Surenex, is very high.
With a low price to receive the task also has a certain risk such as contract
problems. Research agencies often take into consideration a customer’s financial capacity when they are establishing a price. In the future, when Surenex become a large hot company but YSL not allowed to increases the price because they are already sign the contract the price is fixed. At that time some problems will arise and indeed break the contract.
On the other hand, YSL undertake this engagement with a low price may have effect on the service quality. In order to ensure the benefit of the company and base on the establish price, the company may reduce expense or costs necessary. So the service quality of the company may decrease to a certain extent.