Question

The board at Cerulean is discussing how much the company should charge per hour of service. Cerulean has budgeted to supply 100,000 hours of business advisory service for the forthcoming year. Its variable cost is estimated at $30 per hour and its fixed costs are estimated at $1,000,000 for the forthcoming year. The board has been discussing whether to use a cost-plus approach or perhaps examining the demand levels. The marketing department has the following estimation on demand levels at different prices:

Price per hour	Demand in hours
$47	105,000
$48	100,000
$49	95,000
$50	85,000
$51	75,000

The time has come for the board deciding which method using for charging per hour of service.

Required

1. Calculate the price per hour the company should charge based on a cost-plus approach for pricing the service at product cost plus 20%.

2. Considering the company can meet any demand level in the table above and that fixed costs will remain unchanged for all the preceding demand levels, what price per hour should the company charge?

Between the two approaches, which approach should the board choose for the short-term and why?

Answer 1

a)Calculating the price per hour the company should charge based on a cost-plus approach for pricing the service at product cost plus 20%.

Product Cost
Particulars	Amount (per hour)
Variable Cost	30
Add:Fixed Cost ($1000000/100000 hours)	10
Total Cost	40
Add: 20% margin on cost	8
Total Cost to be Charged	48

b) Calculating price per hour that the company should charge

As per Relevant costing concept only variable cost should be charged fro the customer therefore the Company should charge variable cost only as fixed cost remain unchanged i.e Price per hour to be charged should be $ 30.

c) which approach should the board choose for the short-term and why?

The board should choose the approach of relevant costing for the short term as it will result in higher sales and increase the market share of the company.As in the current scenario company can meet any demand level so the concept of relevant costing would be feasible in attracting more customer for short term.