Rhonda Heninger is a well-known software engineer. Her specialty is writing software code used in maintaining the security of credit card information. Heninger is approached by the Electronic Commerce Group (ECG). They offer to pay her $120,000 for the right to use her code under licence in their e-procurement software package. Heninger rejects this offer because it provides her with no additional benefits if the e-procurement package is a runaway success. Both parties eventually agree to a contract in which ECG pays Heninger a flat fee of $120,000 for the right to use her code in up to 10,000 packages. If e-procurement sells more than 10,000 packages, Heninger receives $9.60 for each package sold beyond the 10,000 level.

REQUIRED

1. What is the unit cost of ECG for Heninger’s software code included in its e-procurement package if it sells (a) 2,000, (b) 6,000, (c) 10,000, and (d) 20,000 packages? Comment on the results.

2. For prediction of ECG’s total cost of using Heninger’s software code in e-procurement, which unit cost (if any) of (a) to (d) in requirement 1 would you recommend ECG use? Explain.