PCM Practice Exam Question (from Form3)

The architectural firm has calculated the following financial projections:
Annual hours for 8 billable employees = 16,000 hours
Annual payroll = $715,000
Annual overhead = $380,000
Firm is targeting 20% profit.
What is the hourly billing rate? Round answer up to the nearest whole dollar amount.

Is the correct answer $83/hour or $86/hour?

Option 1:
Step 1: Calculate hourly payroll billing rate: $715,000 / 16,000 hours = $44.69/hour
Step 2: Calculate hourly overhead billing rate: 380,000 / 16,000 hours = 23.75/hour
Step 3: Calculate total hourly billing rate: $44.69 + $23.75 = 68.44/hour Step 4: Calculate hourly profit billing rate: 68.44 X .20 = 13.69/hour Step 5: Calculate total billing rate with profit: 68.44 + $13.69 = 82.13/hour Round up to 83/hour.

Option2:
Step 1: Calculate hourly payroll billing rate: $715,000 / 16,000 hours = $44.69/hour
Step 2: Calculate hourly overhead billing rate: 380,000 / 16,000 hours = 23.75/hour
Step 3: Calculate total hourly billing rate: $44.69 + $23.75 = $68.44/hour
Step 4: Calculate total billing rate with profit: $68.44 : o.8=85.55
Round up to $86/hour

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Hi @danielaiulia and welcome to the ARE Community! @coachlizschneider do you mind jumping in?

@danielaiulia Thanks for the question! Option 1 is the calculation you should follow. Multiplying by .2 will give you 20% of the $68.44. When you divide by .8 it’s the equivalent of multiplying by 1.25 which would be 125% instead of 120% which is what you are looking for. You could also multiply by 1.20 instead of .20 and skip step 5.

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Thank you for clarifying