PcM Practice Question

Comments

12 comments

  • Avatar
    Michael Ermann

    (Y * 2.3) * 1.12 = 95

    1
    Comment actions Permalink
  • Avatar
    Rajan Karmacharya

    Thank you Michael!

    0
    Comment actions Permalink
  • Avatar
    Michael Ermann

    Rajan, you asked me to elaborate (I got an email, but your request hasn't shown up here yet). . . 

    Many architecture firms cover their expenses and make a profit by charging the client three or four dollars for every dollar they pay an architect to work on a client's project. 

    In this example, for every dollar spent on direct salary, the firm spends an additional $1.30 to cover non-billable expenses. 1.30 is called the "overhead rate." Add them together to get the break-even rate of $2.30. The firm will need to charge more than $2.30 to make a profit, and in this case, we're going to charge 12% more (multiply by 1.12 to charge 12% more than something).

    If Y is the hourly wage we pay our architect, to figure out what we'd need to pay him to break even (pay for his salary plus healthcare insurance, the office furniture he sits at, his pro-rated share of HR staff time, plus the plotter ink and the marketing department) we'll need to multiply Y * 2.3

    Y * 2.3 = what we'd charge per hour if we weren't interested in making a profit.

    (Y * 2.3) * 1.12 = what we'd charge per hour if we wanted to earn a 12% profit as a firm (a good idea).

    Because we already know that we charge clients $95 per hour for his time we can say that 

    (Y * 2.3) * 1.12 = 95

    Solving for that. . . 

    2.576Y = 95

    Y = 36.88

    *Never stop at a number without translating it to words to make sure you understand it and that it "makes sense." That will protect you in the event that you set up the equation incorrectly or made a dumb math error. In this case, we can say that "We can pay our architect $36.88 per hour and charge our client $95 per hour for his time, and still have enough to pay the firm's rent, fix the firm's copier, and make a 12% profit." That sounds right to me.

    --Michael Ermann, Amber Book creator

     

     

    1
    Comment actions Permalink
  • Avatar
    Valerie Galchenko

    Hello Michael.

    (Y * 2.3) * 1.12 = what we'd charge per hour if we wanted to earn a 12% profit as a firm 

    Michael, if we wanted to earn 12% profit, we'd have to DIVIDE by 0.88. You are calculating mark up and not a profit. 

    Thank you. 

    1
    Comment actions Permalink
  • Avatar
    Michael Ermann

    Great catch, Valerie! I just made the same mistake that NCARB made on the demonstration exam! I'll try this again (the numbers will come out almost the same). . . as you noted, if we want a 12% profit, we have to take 12% of the total $95 charged to the client, not add 12% to the break-even rate. Adding 12% to the break-even rate would return a "mark-up."

    Many architecture firms cover their expenses and make a profit by charging the client three or four dollars for every dollar they pay an architect to work on a client's project. 

    In this example, for every dollar spent on direct salary, the firm spends an additional $1.30 to cover non-billable expenses. 1.30 is called the "overhead rate." Add them together to get the break-even rate of $2.30. The firm will need to charge more than $2.30 to make a profit, and in this case, we're going to set aside 12% of the $95 as profit so we'll need to multiply the $95 by 0.88.

    If Y is the hourly wage we pay our architect, to figure out what we'd need to pay him to break even (pay for his salary plus healthcare insurance, the office furniture he sits at, his pro-rated share of HR staff time, plus the plotter ink and the marketing department) we'll need to multiply Y * 2.3

    Y * 2.3 = what we'd charge per hour if we weren't interested in making a profit.

    (Y * 2.3)  = 95 * 0.88 . . . This balances things out: on the left side of the equation is what we need to break even, and on the right side is what we'll charge, minus our profit (so also what we need to break even)

    Solving for that. . . 

    2.3Y = 83.6

    Y = 36.34

    *Never stop at a number without translating it to words to make sure you understand it and that it "makes sense." That will protect you in the event that you set up the equation incorrectly or made a dumb math error. In this case, we can say that "We can pay our architect $36.34 per hour and charge our client $95 per hour for his time, and still have enough to pay the firm's rent, fix the firm's copier, and make a 12% profit." That sounds right to me.

     

    1
    Comment actions Permalink
  • Avatar
    Rajan Karmacharya

    Got it! Now I get the complete picture of these calculations... Thank you so much Micheal and Valerie for the explanation. 

     

    0
    Comment actions Permalink
  • Avatar
    Rajan Karmacharya

    Correct me if I’m wrong, this is what I understood from this problem:

    1
    Comment actions Permalink
  • Avatar
    Valerie Galchenko (Edited )

    Break-even rate                                                           NOR (Net Op Rev)
    -------------------------------= Net Multiplier = ---------------------------------

    Inverse target profit percentage                                    Total Direct Labor

     

    This is basically the only formula you will need to answer all possible financial questions on PcM exam (easy 7 points). 

    1
    Comment actions Permalink
  • Avatar
    Rajan Karmacharya

    Awesome! Thank you again Valerie!!

    0
    Comment actions Permalink
  • Avatar
    Gang Chen

    The following article may help:

    https://entrearchitect.com/2015/04/20/7-key-financial-performance-indicators-for-a-successful-architecture-firm/

    Gang Chen, Author, AIA, LEED AP BD+C (GreenExamEducation.com)

    0
    Comment actions Permalink
  • Avatar
    Gang Chen

    My post is locked up again. Can someone at NCARB unlock my post above? Thanks!

    Gang Chen, Author, AIA, LEED AP BD+C (GreenExamEducation.com)

    0
    Comment actions Permalink
  • Avatar
    Mark Baker

    Sometimes getting something wrong and having to rework it - is an amazing way to cement the learning that you are doing.

    For the Exam, I always recommend doing the detailed math problems (like this) twice.

    First, give it your best QUICK attempt to get an answer to be scored.

    The second time- try it in a little different way (make it a word problem, or try to solve backwards for the answer you think is correct) - and see if your answers match.  If not, pick one and walk through it again to see if it is making sense and what that answer comes out to.  

    Great demonstration of that concept Michael!

    Mark, Archizam - ARE 5.0 Practice Exams

    0
    Comment actions Permalink

Please sign in to leave a comment.

Powered by Zendesk