Macquarium Inc. provides computer-related services to its clients. Its two primary services are are Web page design
Macquarium Inc. provides computer-related services to its clients. Its two primary services are are Web page design (WPD), and Internet consulting services (ICS). Assume that Macquarium’s management expects to earn a 20 percent annual return on the assets invested. Macquarium has invested $9 million since its opening. The annual costs for the coming year are expected to be as follows:
Variable Costs Fixed Costs
Consulting support...............................$600,000 $1,500,000
Sales and administration .....................180,000 900,000
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.
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 provide the 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.