Question

Cost-Based Pricing and Markups with Variable Costs

Compu Services provides computerized inventory consulting. The office and computer expenses are $625,000 annually and are not assigned to specific jobs. The consulting hours available for the year total 20,000, and the average consulting hour has $30 of variable costs.

(a) If the company desires a profit of $100,000, what should it charge per hour? Round to the nearest cent.
____

(b) What is the markup on variable costs if the desired profit is $150,000? Round to the nearest whole percent.
____

(c) If the desired profit is $60,000, what is the markup on variable costs to cover (1) unassigned costs and (2) desired profit? Round to the nearest whole percent.
Markup to cover unassigned costs ____
Markup to cover desired profits ____

Answer 1

1)	Desired profit	100000
	Add: Fixed cost	625000
	Add: Variable cost for 20000 consulting hour	600000	(20000*30)
	Total Revenue need	1325000
	Charge per hour would be	66.25	(1325000/20000 hrs)
2)	Desired profit	150000
	Add: Fixed cost	625000
	Add: Variable cost for 20000 consulting hour	600000	(20000*30)
	Total Revenue need	1375000
	Charge per hour would be	68.75	(1375000/20000 hrs)
	Mark up over variable cost	38.75	(68.75 - $30 i.e. (VC)
	Mark up percentage	129%	(38.75/30*100)
3)	Desired profit	60000
	Add: Fixed cost	625000
	Add: Variable cost for 20000 consulting hour	600000	(20000*30)
	Total Revenue need	1285000
	Charge per hour would be	64.25	(1285000/20000 hrs)
	Mark up over variable cost	34.25	(64.25 - $30 i.e. (VC)
	Mark up percentage	114%	(34.25/30*100)
	Markup to cover unassigned cost	104%	(114%/(625000+60000) * 625000))
	Markup to cover desired profit	10%	(114%-104%)
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