SPP (Secure Payment Processing) is the dominant technology firm that provides end-to-end secure Internet transaction processing. SPP offers its e-tailers the best security of their customer personal information in the industry. Its clients include many large and smaller e-tailers selling online products. When an online consumer purchases a product on an SPP client website, the storage of the customer's credit card information and processing the transaction is done by SPP-all of which is invisible to the e-tailer's customer. SPP uses its proprietary encryption software to store the customer's account information on its own servers, not on the e-tailer's server.
SPP is organized into two groups: Set-up Group and Transaction Processing Group. After acquiring a new client or after an existing client revises it Web portal, SPP assigns a team of its software engineers in the Set-up Group to customize SPP's software that links the e-tailer's website to SPP's servers. These SPP software engineers also run diagnostics to ensure the e-tailer's website is secure and is optimized to SPP's software.
SPP charges e-tailer's a set-up charge of $12,000 for its Set-up Group's software engineers to customize the SPP software, optimize the client's site, and test the client's firewalls. Then, the e-tailer is charged a fee of $0.13 per transaction processed each time a customer makes a purchase on the e-tailer's website. The following table summarizes SPP operations for the last 12 months:
Total operating costs ...................................... $28,696,143
Annual number of transactions processed ............. 280,510,000
Number of new or existing client set-ups ........................ 350
Required:
a. SPP calculates the cost of processing a transaction as the ratio of total operating cost divided by the number of transactions processed. Compute the cost of processing a single transaction.
b. The newly hired CFO of SPP worries that the current method of calculating the cost of processing a transaction [as described in part (a)] is too simplistic. After some further analysis, the CFO determines that 39 software engineers (with an average cost of $139,000) work exclusively on new client set-ups. In addition to the wages and benefits of $139,000 per software engineer, the Set-up Group has additional costs of $8,408,143 (occupancy costs, travel, administration, equipment, software licenses, etc.). Both the Set-up Group's wages and additional costs are included in the Total operating costs of $28,696,143. Based on the preceding information, compute the cost of processing a transaction and the cost of a client set-up.
c. Should SPP compute the cost of processing a transaction using the method described in part (a) or the method you used in part (b)? Explain.