Calculation Utilization Rate, Overhead Rate, Break Even Rate, and Net Multiplier

Hi All! Thanks to everyone who spent this holiday weekend in today’s PcM workshop with me today! Someone wanted me to dive a little deeper into how we calculated everything so I thought I would give step by step instructions on how we got to all of the answers:

  • Utilization Rate: Direct Labor/Total Labor (add up all of the billed hours and divide by total labor) *Total labor is typically 2080 hours per year so if you have 3 employees, you’ll multiply 2080 by 3 to get your total labor
    -Direct Labor: Prior to getting the overhead rate we have to find the total direct labor. If we’re only given salary and total billed hours, we’ll have to find the utilization rate of each individual employee. If someone has a utilization rate of 50% and their salary is $100,000, you’ll multiply $100,000 by .5 which gives you $50,000 for their direct labor.
    -Indirect Labor: To get the overhead rate we need to calculate the total indirect labor. Total indirect labor is equal to total salary minus total direct labor.
    -Overhead Rate: Total Indirect Expenses/Total Cost of Direct Labor (total indirect expenses = indirect expenses + indirect labor + office expenses)
    -Break Even Rate: Overhead Rate + 1.0 (as long as you have the overhead rate, it’s very easy to calculate the break even rate)
    -Net Multiplier: Net Operating Revenue/Total Direct Labor (we are given the net revenue and we divide that by the direct labor that we calculated earlier)
    -Profit Percentage: (Net Revenue - Total Expenses)/Net Revenue

Thanks again everyone, feel free to reach out with any questions!

-Rebecca

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