PcM Quizzzzz

Practice Management
1

Question 76
6/21/21

An architecture firm has 4 branch offices in different cities. Some financial information about the offices is listed below.

Charlotte, North Carolina

  • Revenue: $6,500,000
  • Overhead expenses: $1,300,000
  • Salary expenses: $4,300,000

First you must find the profit for each branch office. Profit is the amount left over after expenses such as overhead and salaries are paid and is found by subtracting the expenses from the revenue.

Step 1: Calculate the expenses for each office by adding the salary expense to the overhead expenses.

Charlotte, North Carolina: $1,300,000 + $4,300,000 = $5,600,000

Step 2: Find the profit for each office by subtracting the total expenses from the revenue.

Charlotte, North Carolina: $6,500,000 - $5,600,000 = $900,000

Step 3: Calculate the return on overhead (ROO) by dividing the profits of each office by the overhead expenses for the same office.

Charlotte, North Carolina: $900,000 / $5,600,000 = 0.16 or 16%

In this question, ROO comes from “net profit / indirect Expenses”. So $900,000 should be divided by 1.3M not the 5.6M?
Because, Salary expenses are part of direct salary expenses, not the Indirect expenses.

Any thoughts?

2

This solution threw me off too.
ROO = Profit/OH
OH = Meaning ‘Total Overhead’, captures Indirect Salary Expenses from Billable Staff Salaries as well as Admin staff’s total salary.
The “Salary Expenses” given does not state whether it is Indirect or Total or Direct salary.
I think the word “expenses” in this case is supposed to mean Indirect.
So for Total Overhead, here, you would add Overhead Expense + Salary Expense.
It is a tiny bit ambiguous, I agree.