Survey Masters LLC (A) Harvard Case Solution & Analysis

QUESTION 1 

Scenario

For the first part i.e. Panel 2A, Linda divided the projects on the basis of salaries, which resulted in 20 Largest and 100 smallest projects out of the total 120 projects. The revenues of these projects were $1.3 and $1.5 million respectively.The salaries have been allocated equally in both the largest as well smallest projects at $400,000 each. The overheads are also divided in the same manner at $700,000 in each case. The resulting net income from smallest 100 is $400,000, which is exactly twice of the largest 20.

Comments

Linda has divided the costs as well as the revenue on the basis of a single item i.e. salaries. This has led to the division of the costs on equal basis irrespective of their actual occurrence. The revenues have been divided into largest and smallest as 46% and 54%. These revenues have also been allocated on the basis of the salaries; therefore they are also showcasing a false representation of the revenues as opposed to the real situation.

The contribution of both the projects in terms of net income has been as 33% and 67%.This shows that the smallest projects are more profitable as compared to the largest projects. The basis and method adopted in the scenario is wrong and therefore, it represents a false and wrong view in terms of calculation and profitability of the company.

Scenario

In the second part i.e. Panel 2B, Linda has equally divided the projects into largest and smallest by categorizing 60 projects in each category. The salaries as well as overheads are proportioned and distributed in both the projects accordingly. These costs have been allocated as 75% and 25% in largest and smallest category. The resulting net income from both the projects contributes equally in the total income with the contribution of $300,000 from each category.

Comments

The selection of the companies by Linda does not provide a clear basis of what projects have been categorized in the largest and smallest categories. The projects have been divided equally without any basis for division. The costs, however, are divided accordingly, which shows a division of 75% and 25% for largest and smallest categories. The resulting net income is equal, which shows difference in both the projects.

This difference in income is due to the wrong selection done by Linda without providing any basis of selection and categorization of the projects. This has led to an equal contribution from the both the projects, which is again a false representation as opposed to the real situation.

Profitability of Smaller Projects

The smaller projects appear to be profitable or at least equally profitable as compared to larger projects. The reason is that      in the first case, the selection criterion was salaries and therefore, the revenues were divided accordingly. This led to a 54% division of total revenue into the smallest category as compared to 46% in the largest category. Since the costs and overheads were equally distributed, therefore, smaller projects showed more profit as compared to the largest projects.

In the second case, the revenues were divided on the basis of the number of projects. This led to an apportionment of 70% and 30% in revenues for Largest and Smallest respectively. Although the costs were allocated accordingly, however the equal division in terms of number of projects led to an equal contribution in terms of net income of both the projects.

QUESTION 2

Project Size and Profitability

The information provided in Exhibit 3 shows the actual contribution and distribution of the overheads in the largest 20 and the smallest 100 scenario.By applying this distribution on the original scenario, the net income of both the projects changed. The net income of the smallest 100 projects, which was almost double as compared to the largest, significantly decreased from $400,000 to $27,857. This change is due to the deduction of actual amount of overheads rather than the assumed amounts.

By applying the actual figures, it can be concluded that in the actual situation, project size has a direct relationship with the profitability. The larger the project, the more will be the profitability. Although the average overhead cost per project of large projects is more than the smaller ones, however,still per project net income of large project is more than smaller ones. This is mainly due to the average revenue per project, which is $50,000 more than that of the smaller projects. Since the revenue of large projects is more, therefore, the income is also more than small ones.....................

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