Question

Part 2
Communications Unlimited provides support services to its clients.
This company expects to earn an annual return on the assets invested at a rate of:			20%
The company has the following amount invested in the business:			$8,000,000
The annual budgeted costs for next year are:
	Variable costs	Fixed costs
Support Services	$600,000	1,900,000
The annual budgeted hours for next year are:
Consulting services	60,000	hours
Required:	You must use cell references for all calculations.
5. Determine the markup on total costs in percentage terms.
6. Determine the total cost per hour.
7. Determine the revenue per hour that will be charged if total costs is the basis for markup.
8. Explain why answers 2-4 in comparison to 5-7 are the same or different.
9. Discuss the advantages and disadvantages of using a cost-based pricing model.
You need to include an outside reference that supports your discussion on advantages and disadvantages of using a cost-based pricing model.
Make sure you include the reference in APA style. Enter your response in the textbox below.

Answer 1

	A	Amount invested in business	$8,000,000
	B=A*0.2	Required Return	$1,600,000
		Annual Budgeted   cost :
	C	Variable Cost	$600,000
	D	Fixed Cost	$1,900,000
	E=C+D	Total Cost	$2,500,000
	F	Return	$1,600,000
	G=F/E	Mark up on total cost	0.64
		Mark up on total cost in percentage term	64%
	H	Annual budgeted hours	60,000
	I=E/H	Total Cost Per Hour	$                   41.67
	J=E+F	Total Revenue	$4,100,000
	K=J/H	Revenue per hour that will be charged if total costs is the basis for markup.	$                   68.33
		Advantages of Cost Based Pricing Model:
		Simple and easy to calculate
		If costs are stable, prices will be stable to customers. It iseasy to administer
		This method gives guaranteed profit and no scope of making loss
		In absence of demand forecasting and market information, this method gives basis for pricing
		Disadvantages:
		This method ignores the value to customers
		This method ignores market demand and supply equation
		This method cannot be used for perishable goods
		This method do not give incentive to efficiency and cost reduction