Question

primary services are are Web acquarium's management ex nvested $9 million since 8-27. Product Pricing: Two Products Macquarium Inc. provides computer-related services to its clients. Its two primary page design (WPD), and Internet consulting services (ICS). Assume that Macquarium pects to eam a 20 percent annual return on the assets invested. Macquarium has invested its opening. The annual costs for the coming year are expected to be as follows: Fixed Costs Variable Costs $600,000 180,000 $1,500,000 900,000 Consulting support........... Sales and administration ...... The two services expend about equal costs per hour, and the predicted hours for the coming year are 40.000 for WPD and 20,000 for ICS. Required a. If markup is based on variable costs, how much revenue must each service generate to provide the profit expected by corporate headquarters? What is the anticipated revenue per hour for each service? b. If the markup is based on total costs, how much revenue must each service generate to pro expected profit? c. Explain why answers in requirements (a) and (b) are either the same or different. d. Comment on the advantages and disadvantages of using a cost-based pricing model

Answer 1

Computation of expected profit of Macquarium =    investment* Annual rate of return on investment
					= $ 9 million*20% = $1.8 Million
computation of expected profit per hour = Expected profit/ Total Predicted Hours = 1800000/(40000+20000) = $30
Computation of total cost & Expected profit for each Serives
	variable cost	fixed cost	Total cost	Predicted hours	Expected Profit
Consulting support	600000	1500000	2100000	40000	(40000*30) = $1200000
Sales and administration	180000	900000	1080000	20000	(20000*30) = $600000

a	if markup is based on Variable Cost, Total revenue for consulting support per hour = (Total Cost+Expected Profit)/ predicted hours
						=(2100000+1200000)/40000 = $82.5
	if markup is based on Variable Cost, Total revenue for sales and administration per hour = (Total Cost+Expected Profit)/ predicted hours
						=(1080000+600000)/20000 = $84

b	if markup is based on Fixed Cost, Total revenue for consulting support = (Total Cost+Expected Profit) =($2100000+$1200000) = $3300000
	if markup is based on Fixed Cost, Total revenue for sales and administration = (Total Cost+Expected Profit) = ($1080000+$600000) = $1680000

c	Answer in requirement (a) and (b) are same for the reason of the fact that there is no over/(under) application of fixed overheads .i.e., fixed overhead are applied on actual basis

d

Advantages

1. It is easy to understand and calculate the price

2. This pricing models make sure that incurred cost are covered

3. they can be helpful and do simply investment appraisal decisions for example required rate of return

4. Can be useful when setting price of new and innovative products

Disadvantages

1.These method ignored demand and price elasticity of demand

2. Ignore competitive situation example when competitors are charging

3. Does not take advantage of market potential doctors new and innovative such as iPad was when it was introduced there is a potential to charge a high price

4. inflexible in the face of changes in demand level

5. takes into accounts sunk and unavoidable cost

6. can result in underpricing or Overpricing