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.
Suggested case structure
- 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.
- Marginal Cost: Estimate the total costs associated with hiring a new Associate; understand if there are any costs in addition to the salary
- Marginal Profitability
- Estimate marginal profit generated by adding a new Associate
- Understand the marginal revenue over the tenure of the Associate
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 :
𝑅𝑒𝑣𝑒𝑛𝑢𝑒 𝑝𝑒𝑟 𝑎𝑠𝑠𝑜𝑐𝑖𝑎𝑡𝑒=𝐻𝑜𝑢𝑟𝑙𝑦 𝑏𝑖𝑙𝑙𝑖𝑛𝑔 𝑟𝑎𝑡𝑒×𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑏𝑖𝑙𝑙𝑒𝑑 ℎ𝑜𝑢𝑟𝑠×𝐷𝑎𝑦𝑠 𝑤𝑜𝑟𝑘𝑒𝑑 𝑝𝑒𝑟 𝑦𝑒𝑎𝑟
As the revenue generated by new Associates is higher than the salary, it makes sense to delve deeper into costs.
The interviewee should enquire about the total costs associated with hiring an Associate.
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 $3,000 in statutory liabilities per year for every Associate
- Associates stay with the firm for a year on average
Cost estimate: The total cost associated with a new Associate would be
𝑇𝑜𝑡𝑎𝑙 𝑐𝑜𝑠𝑡 =𝑆𝑎𝑙𝑎𝑟𝑦+𝑇𝑟𝑎𝑖𝑛𝑖𝑛𝑔+𝑅𝑒𝑐𝑟𝑢𝑖𝑡𝑚𝑒𝑛𝑡 𝑐𝑜𝑠𝑡𝑠+𝑆𝑡𝑎𝑡𝑢𝑡𝑜𝑟𝑦 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
The total costs of a new Associate are higher than just his salary
Now the interviewee can calculate the marginal profit.
𝑀𝑎𝑟𝑔𝑖𝑛𝑎𝑙 𝑟𝑒𝑣𝑒𝑛𝑢𝑒 −𝑀𝑎𝑟𝑔𝑖𝑛𝑎𝑙 𝑐𝑜𝑠𝑡𝑠
The addition of a new Associate to the firm leads to a marginal loss of 5,000$. Hence its not prudent to add a new Associate at a salary of $65,000 per annum.
4. Other factors
- 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.
- 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.