Your company completed the site work for the South Pointe office complex. The co

Question

Your company completed the site work for the South Pointe office complex. The costs are shown as following table. The site concrete labor and landscaping were done by subcontractors. The demolition and grubbing and the grading and excavation were done by the company’s excavation crew. The company’s minimum profit and overhead markup is 17%.

1. Determine the profit generated by the project management

2. Determine the profit generated by the minimum profit & overhead

3. Determine the profit generated by the estimator

Explanation / Answer

The Master in Project Management is designed to equip executives to lead, plan organize and oversee complex global projects efficiently and effectively. Professionals equipped to lead teams based on the development of executive skills and techniques required by directors. In short, Project Directors who can align the present needs of companies in terms of project management with the current requirements stipulated in the global standard of the Project Management Institute (PMI): minimizing risks, creating new opportunities and achieving the objectives that have been set.

Five reasons for taking EAE’s Master in Project Management:

1. The program incorporates specialist software for simulating or modelling departments and processes related to Project Management, such as Microsoft Project Professional and Risk from the Palisade Corporation, a global leader in risk and decision analysis.

2. EAE Business School is a Registered Education Provider (REP) certified by the Project Management Institute (PMI), the leading international association of Project Management professionals. To achieve this certification, REP institutions of the PMI have to comply with a rigorous set of quality standards, both in terms of the content and design of the Masters and the training of the academic faculty.

3. The Master in Project Management prepares participants to take the examination for certification as a Project Manager Professional (PMP) of the Project Management Institute (PMI). Students who successfully complete the Master are eligible to take the PMP certification test run by the PMI.

4. Participants on the Master in Project Management may register as Students Members of the Project Management Institute, which enables them to take advantage of benefits including access to a multitude of bibliographic sources.

5. EAE is ranked as the second most reputable business school in Spain

Businesses calculate their profit margins for a defined period as the ratio of profit to revenue. The profit margin reveals the degree to which a company can pay its expenses and generate profits from the sale of its products or services. Calculations for profit margins depend in part on the business type and the product or service sold. Manufacturers and distributors are involved in wholesale and retail sales. Manufacturers make products. Distributors buy products from manufacturers and sell them to individuals or other businesses. Profit margins for all businesses are based on the proportion of expenses to revenue.

Profit Margins

A company’s profit margin demonstrates the health of its finances and the efficiency of its operations. Management decisions, such as product pricing and controlling expenses, affect profitability. The three types of profit margins – gross, operating and net – involve different types of expenses. However, each measures profitability against revenue by adjusting for expenses, which can vary greatly between distributors and manufacturers. The gross profit margin -- which measures profit after subtracting the cost of making the goods -- helps manufacturers track the costs directly related to making and selling the product. Distributors focus on the difference between what the company pays for a product and the price at which the product sells. The larger the difference between the two numbers -- which is called the spread -- the greater the profit.

Expenses

Manufacturing expenses used to calculate gross profit margin include direct labor costs, which are the wages and benefits of the workers who make the product, such as machine operators or assemblers. Manufacturing overhead includes costs related to the manufacturing facility, including insurance, taxes, salaries for indirect labor and equipment. Manufacturers also have operating costs, which are indirect costs that are not related directly to the making of the product and are similar to those a distributor might incur. A distributor’s expenses include the purchase price of the product, the cost of shipping to receive the product, expenses related to inventory management and administrative overhead.

Pricing

Manufacturers and distributors price their products to achieve the greatest profit margin possible. Some manufacturers use cost-plus pricing, which adds the desired profit percentage to the total of the costs for materials, direct labor and overhead. A product that costs $120 to make must sell for $150 to realize a 20 percent profit margin for the manufacturer. Distributors often use the markup method, which involves adding a predetermined percentage to the company’s purchase price to arrive at the price for customers. A distributor might purchase a product for $10 and sell it for $20, for a 50 percent markup. Some distributors consider the purchase price of the product and the shipping costs to receive the product when determining pricing.

Manufacturers Vs. Distributors

The calculation for gross profit margin is revenue minus direct costs divided by revenue. For instance, a manufacturing company sells a product for $10,000 after generating $6,000 in direct costs, which leaves a gross profit of $4,000. Divide 4,000 by 10,000 for a gross profit margin of 40 percent. The distributor that buys the $10,000 product must factor in the acquisition cost when determining the gross profit margin. The costs may include shipping, delivery and overhead. The distributor’s gross profit margin is the difference between the cost of the goods and the total sales.

Forecasting Sales and Profits

Forecasting sales and profits, particularly on a short-term basis (one year to three years), is essential to planning for business success. This process, estimating future business performance based on the actual results from prior periods, enables the business owner/manager to modify the operation of the business on a timely basis. This allows the business to avoid losses or major financial problems should some future results from operations not conform with reasonable expectations.

Forecasts - or Pro Forma Income Statements and Cash Flow Statements as they are usually called - also provide the most persuasive management tools to apply for loans or attract investor money. As a business expands, there will inevitably be a need for more money than can be internally generated from profits. Next, let's examine some facts affecting Forecasting sales and profits.

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