The following question was submitted for this past Sunday’s workshop and required additional followup in order to answer. I’m posting it here in hopes that folks will see it.
Q: I am having an issue with the answer provided in one of the practice exams. I am getting a different answer using a different approach. Please let me know what I am missing. Here is the question:(#14 Exam form2)
The billable rate for employees at an architecture firm is comprised of base salary plus the rate of benefits, overhead, and profit margin. The firm has a benefits rate of 30% and an overhead rate of 110%.
If the base salary for an employee at the firm is $30/hour and the billable rate for the employee is $80/hour, what is the net profit margin? Round to the nearest whole number.
My answer: 20%
I am using a formula which I believe was used in another practice exam to find the target profit percentage. Please confirm this is a correct formula:
Net multiplier= Breakeven rate / Inverse of target profit percentage
- Overhead rate=110%=1.1
- Breakeven rate=1.1+1=2.1
- Net multiplier=80/30=2.66
2.66= 2.1 / Inverse of target profit percentage
Inverse of target profit percentage=0.79
Answer provided in the practice exam:10%
Use the formula stated in the question: the billable rate = base salary + benefits rate + overhead rate + profit margin.
The base salary for the employee is $30/hour. First, find the amount to be added to the base salary for the benefits rate:
- $30 x 30% benefits rate = $9/hour
Next, find the amount to be added to the base salary for the overhead rate:
- $30 x 110% = $33/hour
- Base salary + benefits rate + overhead rate = $30 + $9 + $33 = $72
Then, subtract from the billable rate:
- $80 - $72 = $8
Lastly, find the percentage of net profit. Net profit should be calculated from the total revenue, not the base salary or net revenue.
$8 / $80 = 10%
Alternatively, use the formula for net profit margin: (revenue-cost)/revenue ($80-$72) / $80 = .10 = 10%
(Response in comments)