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Case

# D&Y

Difficulty: Beginner
Topics:

Case prompt

D&Y is a large financial services firm based out of Austria. It provides audit and taxation services to large local firms.

D&Y is evaluating hiring CPA (Certified Practising Accountant) as Associates in the firm. These are fresh CPAs who have just finished their examination. The firm is contemplating a salary of 65,000 \$ per annum for these Associates.

They want you to evaluate if this is a good idea.

Detailed solution

Paragraphs highlighted in orange indicate hints for you on how to guide the interviewee through the case.

Paragraphs highlighted in blue can be verbally communicated to the interviewee.

Paragraphs highlighted in green indicate diagrams or tables that can be shared in the βCase exhibitsβ section.

## Suggested case structure

Key question: At this salary, would the marginal profit from a new Associate be positive?

Suggested steps ranked by priority:
1. Marginal Revenue: Understand how much revenue a new Associate generates in a year. This could be based on various factors like billable hours, billing rate per hour etc.
2. Marginal Cost: Estimate the total costs associated with hiring a new Associate; understand if there are any costs in addition to the salary
3. Marginal Profitability
1. Estimate marginal profit generated by adding a new Associate
2. Understand the marginal revenue over the tenure of the Associate

Prompt the interviewee to lay out the approach for reaching the solution.

## 1. Revenue

The interviewee should enquire about the revenue generated by a new Associate

Communicate the below information to the interviewee to estimate revenue

• Hourly billing rate is \$50
• The Associates work 8 hours per day on an average
• The average hours billed per Associate per day is 6
• Associates work 250 days in a year on an average

Revenue estimate: The total revenue generated by a new Associate per year would be :

πππ£πππ’π πππ ππ π πππππ‘π=π»ππ’πππ¦ πππππππ πππ‘πΓπ΄π£πππππ ππππππ βππ’ππ Γπ·ππ¦π  π€πππππ πππ π¦πππ

Hence,

50\$Γ6Γ250=75,000\$

Key insight

As the revenue generated by new Associates is higher than the salary, it makes sense to delve deeper into costs.

## 2. Costs

The interviewee should enquire about the total costs associated with hiring an Associate.

Prompt the interviewee to list out what other costs should be considered if he wishes to calculate total costs β e.g. recruitment costs, training costs, taxes, overheads etc.

Communicate the below information to the interviewee to estimate costs

• Associates go through an intensive 15 day training program. The cost of the program is \$5,000
• The HR department has estimated that the average cost of recruitment of Associates is \$7,000 per person
• The company needs to pay \$3,000 in statutory liabilities per year for every Associate
• Associates stay with the firm for a year on average

Cost estimate: The total cost associated with a new Associate would be

πππ‘ππ πππ π‘ =ππππππ¦+ππππππππ+πππππ’ππ‘ππππ‘ πππ π‘π +ππ‘ππ‘π’π‘πππ¦ ππππππππ‘πππ

Hence,

65,000\$+5,000\$+7,000\$+3,000\$=80,000\$

Key insight

The total costs of a new Associate are higher than just his salary

## 3. Profit

Now the interviewee can calculate the marginal profit.

Marginal profit:

ππππππππ πππ£πππ’π βππππππππ πππ π‘π

Hence,

75,000\$β80,000\$=β5,000\$

Key insight

The addition of a new Associate to the firm leads to a marginal loss of 5,000\$. Hence its not prudent to add a new Associate at a salary of \$65,000 per annum.

## 4. Other factors

Prompt the interviewee to focus on other factors that should be considered

Potential other factors to be considered include:
1. Marginal cost analysis if the tenure is more than 1 year - As the recruitment costs would not recur and the billing rates might increase with experience. This analysis would require raises to be considered.
2. Different profile of hires - Suggestion to evaluate a cheaper assistant who can do a part of the work/ hire a more experienced accountant whose billing rates would be higher.

Exhibits
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