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Northeast, Inc. is a technology consulting firm focused on website development and integration of internet business...

Northeast, Inc. is a technology consulting firm focused on website development and integration of internet business applications. The company has allocated the following costs under its ABC system to the Tallman engagement: Northeast desires a 20% target net profit after covering all costs. Considering the total costs assigned to the Tallman engagement, what would Northeast have to charge the customer to achieve that net profit. Round to two decimal places

Total Direct labor cost: 39,000

Allocated overhead costs: 53,470

The total cost of engagement: 92,470

What should Northeast charge for the Tallman engagement? Please explain the formula which is " The total cost of engagement / Engagement cost as a percentage of revenue.

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Answer #1

1. Computation of Northeast charge for the Tallman engagement:

Northeast desires a 20% target net profit after covering all costs. Hence, if we consider the revenues as 100%, it will comprise of 80% Cost and 20% Net Profit.

Northeast charge for the Tallman engagement = Total Cost of Engagement / Engagement cost as a percentage of revenue

Therefore, Northeast charge for the Tallman engagement = $92,470/80% = $115,587.50

The formula i.e.  " The total cost of engagement / Engagement cost as a percentage of revenue is itself the formula to calculate the revenues.

If we devide the total cost by the percentage of that cost of the revenue we will get the dersired revenue. The same has also been used in the above calculation which clearly indicated its meaning.

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