Profit and Loss Statement

Mohamad Abu-Hilal
EGR 4050.01
November 27, 2019

1

Homework #14

1- Discuss the relationship between Utilization Rate, Direct Labor, and Indirect Labor

and their potential impact to the success (re: profitability) of a company.

To be able to understand the relationship between Utilization Rate, Direct Labor, and Indirect

Labor, their definitions separately need to be understood as well.

Direct Labor & Indirect Labor:

One of the main goals of any company is to make profit, which can be achieved by generating a

higher revenue earned than the costs spent. Therefore, it is clear that it is of extreme importance

for companies to understand and analyze their costs thoroughly, in which indeed there are

different types of costs. The cost that covers all the work that employees are involved is called

labor cost, in which there are two types of that cost; direct labor cost and indirect labor cost.

Direct labor cost represents the costs related to an employee’s work that directly relate to a

project, while indirect labor cost represents the costs relation to an employee’s work that is not

directly related to a project, but instead to other duties.

Utilization Rate:

It is very important for companies to be able to determine how much will they be charging their

time to their clients. This determination is related to the company’s employees in terms of

performance and productivity. Therefore, the Utilization rate is basically a percentage that

represents an employee’s charged time spent working on a project.

Based on the above definitions, it is noticeable that the Utilization Rate is dependable on the

direct and indirect labor performed by employees, and will become higher if an increase in the

productivity of employees occurs. Employees will need to have more hours of direct labor work

out of the total hours that they have in order to achieve a high rate. Therefore, if an employee’s

hours involve more indirect labor, then their Utilization Rate will not be high implying that they

are not productive. The most suitable situation for a company will include the participation of its

employees in more hours of work involving direct labor, while completing the work in a

reasonable and efficient time. This will result in a high Utilization Rate that shows how

productive the company is, and consequently the company can charge its clients reasonably to

cover labor costs, or other costs.

Jeff Thompson
yes

Jeff Thompson
Yes, like training, marketing, etc.

Mohamad Abu-Hilal
EGR 4050.01
November 27, 2019

2

2- Design Professional Firms create project and business budgets based upon a Labor
Multiplier Factor. Taking into account that information:

a. What would expect your annual salary to be upon graduation? Convert that salary into an
hourly rate (base on 2080 work hours annually)

b. Now, what do you believe is a reasonable hourly rate at which your company will charge
for your services, i.e. what rate (dollars) will the company bill out your services at?

c. What factors did you consider/take into account when you determined your billing rate?

a. Expected annual salary is $65,000

The equation used in order to calculate the hourly salary is simply the following:

● Hourly salary = (annual salary) / (total hours)

The table below represents the hourly salary based on an annual salary of $65,000 and

2080 hours of work annually.

b. A labor multiplier factor is needed to convert the hourly salary into an hourly rate. Since
the labor multiplier factor is not provided, I will assume that it is 3.2. Based on this labor

multiplier factor, the equation used to find the hourly rate is simply the following:

● Hourly rate = labor multiplier factor * hourly salary

The table below represents the hourly rate based on the assumed labor multiplier factor,

and the calculated hourly salary in part a.

Name Title
Annual

Salary ($)

Total

Hours

Hourly

Salary ($)

Labor Multiplier

Factor

Hourly

Rate

Mohamed Abu

Hilal

Staff

Engineer
65,000 2080 31

3.2 100

c. As shown above in the equation of the hourly rate, a very important factor that I took into
account is the labor multiplier factor. The labor multiplier factor is directly proportional

to the hourly rate, because this multiplier is an indication of the work done by employees,

and how efficient it is.

Name Title Annual Salary Total Hours Hourly Salary

Mohamed Abu Hilal Staff Engineer 65,000 2080 31

Jeff Thompson
yes

Mohamad Abu-Hilal
EGR 4050.01
November 27, 2019

3

3- What do you believe is a reasonable availability or utilization rate (the percentage of
your time that is charged to billable projects) is for a staff engineer one month after the

engineer starts working for the company after just graduating from college?

a. 6 Months?
b. 1 Year?
c. Explain the reasoning for your responses

A reasonable availability or utilization rate for a staff engineer just graduating from

college with a one-month period of time working for a company I believe is 30%.

a. For a staff engineer with the same description provided above, yet 6 months after they
start working for a company, a reasonable availability or utilization rate I believe is

between 70% – 80%

b. For a staff engineer with the same description provided above, yet 1 months after they
start working for a company, a reasonable availability or utilization rate I believe is

between 85% – 100%

c. The reasoning behind my response is based on the definition of availability or utilization
rate, its purpose, the description of the staff engineer, and the periods of time given. The

utilization rate is a percentage that shows the amount of time that employees in a

company can spend doing effective chargeable work in relation to a project, and the

purpose of this rate if to reflect efficiency. Therefore, it is reasonable for a staff engineer

who just graduated and is new to their job, to be involved in work that does not directly

affect projects of the company, due to their inexperience. In the first month, a new staff

engineer in a company will take their time to learn about how things work, and practice

mostly in indirect labor. For this reason, and based on the idea that the utilization rate

indicates how productive employees are, it is very reasonable for this rate to be low

during the first month. Nevertheless, it is also reasonable for this rate to increase with

time for the staff engineer described above. This is because the engineer will begin to

learn different things about the company, and complete their work in accordance to the

company’s goals and expectations, which will without a doubt show productiveness

within the staff engineer’s work. Therefore, the utilization rate might have increased

during the first 6 months, yet, the staff engineer might still need to do some work related

to indirect labor, and continue to learn and build their skills. That is why I believe that it

ranges between 70% – 80%. After 1 year of the staff engineer being an employee at a

company, I believe that they would have learned good enough to be involved in many

tasks directly related to the project, and as a result increase their productivity. Therefore,

depending on the company’s job environment, how much a quick learner the engineer is,

the company’s projects and how big they are, the company’s goals, and many more, I

believe that the utilization rate can range, but in the high numbers almost between 85% –

100%.

Jeff Thompson
Yes

Mohamad Abu-Hilal
EGR 4050.01
November 27, 2019

4

4- If your business is expected to have annual revenue of $9,385,000, Direct Labor Costs of
$2,950,000, and achieve a Profit of 16%, answering the following:

a. What would your total costs (i.e., total expenses) be?
b. What would your Breakeven multiplier be?
c. What would your Target Multiplier be?

a. For companies to make profit, their revenue has to be higher than their costs. Therefore:
Profit = Revenue – Total Costs

We can find total costs using the following equation:

Profit % = Profit / Total Costs = (Revenue – Total Costs) / Total Costs

We then put total costs as the subject, and solve for it. The table below represents the

total costs based on a profit of 16% (or 0.16) and an annual revenue of $9,385,000:

Profit % Annual Revenue ($) Total Costs ($)

16 9,385,000 8,090,517

b. The equation used to find the Breakeven Multiplier is:

Breakeven Multiplier = Total Costs / Total Direct Labor Costs

Therefore, based on the above equation shown, the table below shows the calculated

Breakeven Multiplier based on the total costs found in part a of the question and the

given total direct labor costs ($2,950,000):

c. From the given profit % in the question, and the Breakeven Multiplier that was just
found, the equation used to find the Target Multiplier is:

Target Multiplier = Breakeven Multiplier + profit %

Therefore, the table below shows the calculated Target Multiplier based on the

Breakeven Multiplier found in part b, and the profit % given in the question (16% or

0.16):

Breakeven Multiplier Profit % Target Multiplier

2.743 16 2.903

Total Costs Total Direct Labor Costs Breakeven Multiplier

8,090,517 2,950,000 2.743

Jeff Thompson
For Part 4a – total costs (= total expenses)  E=R(1-PM) = $9,385,000 (1-0.16) = $7,883,400. For Part 4b – BEM = total expenses/direct labor = $7,883,400/$2,950,000 = 2.67
For Part 4c – TM = Total Planned Revenue/Direct Labor = $9,385,000/$2,950,000 = 3.18

Mohamad Abu-Hilal
EGR 4050.01
November 27, 2019

5

5- If the Breakeven Multiplier is used to determine the multiple of direct labor dollars a
company needs to take in (i.e., Revenue) to break even (no profit, did not lose money),

what is the difference between the Breakeven Multiplier and Labor Multiplier Factor

(also known as the Target Multiplier)?

It is very important for a company to determine how much revenue it needs to make in order to

break even, and accordingly to start making profit. In other words, when the revenue is exactly

equal to the cost, the company would not be at a loss nor making profit. In relation to the direct

labor dollars, the Breakeven Multiplier helps a company determine how much revenue it needs

in order to break even, and that is by determining the multiple of direct labor dollars. Another

factor that takes into account direct labor is the Target multiplier. This multiplier determines the

productivity of the employees working on a project in relation to the spending on direct labor.

Therefore, the main difference is that the Target Multiplier reflects performance, and therefore

the higher it is, the more profit the company can generate. On the other hand, The Breakeven

Multiplier will help break even, and not generate profit. Therefore, when the two are taken into

account by a company, it needs to ensure that the Target Multiplier is higher than the Breakeven

Multiplier in order to generate profit.

Jeff Thompson
Yes – so the difference is Profit.

Mohamad Abu-Hilal
EGR 4050.01
November 27, 2019

6

6- Download the Sample P&L spreadsheet.

1a.

Total Gross Revenue: $2,176,400

Breakeven Labor Multiplier 2,176,400/868,370= 2.51

Due to the description given in the excel sheet I was able to get the earnings before taxes to be

260 which is in the range of +or – 2000 and the gross profit to be 0.0%. The gross revenue to be

$2,176,400 and the breakeven labor multiplier by dividing 2,176,400/868,370 to get 2.51.

Mohamad Abu-Hilal
EGR 4050.01
November 27, 2019

7

1b.

Total Gross Revenue: $2,175,152

Breakeven Labor Multiplier 2,175,152/907,850= 2.39

In 1b I was asked to increase the utilization of the staff engineers and CAD operator to 100% and

the sheet asked to change the hourly rate for those workers too to get the earnings before taxes to

be -988 the gross profit 0.0% and the gross revenue to be 2,175,152 to get the breakeven labor

multiplier to be 2.39.

Mohamad Abu-Hilal
EGR 4050.01
November 27, 2019

8

Exercise 2

The Utilization Rate for Staff Engineers: 118%

The Utilization Rate for CAD Operator: 80%

Earnings before taxes: $386,740

Gross Profit: 13%

Average Labor Multiplier: 3.51

The two most important ones that I focused on changing were the CAD Operator to 80% and the

Staff Engineer 118% the I changed the project engineer to 85% and the project manager to 40%.

This ended up with the Earnings before taxes to be 386,740 and the gross profit to be 13.0% and

the Average Labor Multiplier to be 3.51.

Mohamad Abu-Hilal
EGR 4050.01
November 27, 2019

9

Exercise 3

The Utilization Rate for Staff Engineers: 111%

The Utilization Rate for CAD Operator: 127%

Earnings before taxes: $400,088

Gross Profit: 12.4%

Average Labor Multiplier: 3.33

For this part I changed the Staff Engineer to become 111% the CAD tech to be at 127% the

project manager at 52% and the project engineer at 80% this gave me earning before taxes to be

$400,088 and a gross profit of 12.4% and at the end the Average Labor Multiplier to be 3.33.

Jeff Thompson
Good work. As we discussed in class 111% utilization is a challenge.