case 6 gotcha

Case # 6:“GOTCHA!”
Doug Terry, one of the two account supervisors in your group, walks into your office one fine morning and proceeds to tell you that the Marketing Director for High West Financial Services, one of the clients in your account group, is questioning the agencyâ€s billing practices. Specifically, the client is questioning the hourly charge out rates for employees working on the account under the agreed contract/services agreement.
As the Group Account Director on the High West business, you – along with the agencyâ€s CFO – handled the contract negotiations with High West that resulted in the approved contract/services agreement that contains an Agency Fee Addendum. Per the contract, the client has agreed that the agency will charge time-time of staff on the High West account using “multiplier” of 2.50 on employee direct salaries to cover direct salaries, benefits, overhead and mark-up of 25% (on direct employee costs). The formula for the contractually agreed fully allocated cost charge out rate on High West is below:
Direct Salary + Benefits (20%) + Overhead (Direct Salary x 1.0)+25% (direct costs)=Employee Hourly
1800 Annual HoursCharge Out Rate
Doug proceeds to tell you that the agency Account Supervisor (AS) on the High West account regularly plays golf with High Westâ€s Advertising Services Manager, and at some point, inadvertently told her that she makes $62,000 working at the agency.And while this all seems very innocent at the time, the client files this information away and quietly goes to work. What could possibly go wrong?
Using the salary information provided, the Advertising Services Manager computes that if the AS works 40 hours per week, that the ASâ€s time on the High West Financial account would total 2,080 hours per year. Doing the math using the $62,000 salary information she obtained purely through happenstance from the AS, the High West Advertising Services Manager computes that the ASs charge out rate is $29.80/hour. The Advertising Services Manager goes back and checks the “math” against the charge out rate of $86.11 as outlined in the Agency Fee Addendum to the contract, and determines the agency is overcharging High West $56.31/hour for the ASâ€s time on the account.
The Advertising Services Manager goes to the Marketing Director with this information, and the Marketing Director immediately calls Doug to set up a meeting the following morning at 9:00 a.m. and wants a “full and transparent review” of the agencyâ€s billing practices and charge out rates for employees on the High West account. How do you respond?
THE BIG QUESTION
Is the Advertising Service Managerâ€s assertion regarding the agencyâ€s “over charge” correct?

THE BIG QUESTION
Is the Advertising Service Managerâ€s assertion regarding the agencyâ€s “over charge” correct?
YES _____
NO _____
The rationale behind your answer:

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