Question

Cost-Based Pricing and Markups with Variable Costs

Compu Services provides computerized inventory consulting. The office and computer expenses are $400,000 annually and are not assigned to specific jobs. The consulting hours available for the year total 20,000, and the average consulting hour has $20 of variable costs. If the desired profit is $160,000, what is the markup on variable costs to cover (1) unassigned costs and (2) desired profit?

Markup to cover unassigned costs Answer %

Markup to cover desired profits Answer %

Answer 1

Variable cost per hour

$ 20 per hour

Fixed cost (office and computer expense)

400,000

Consulting hours

20,000 hours

Req 1:

Total Variable cost (20,000 horus @20)

400,000

Unassigned fixed cost

400,000

Therfore, % markup of unassigned cost as % of Variable cost (Unassigned cost/ Variable ccost)*100 = (400,000/400,000)*100 = 100%

Req 2:

Desired Profits: $ 160,000

Total Variable cocst: $ 400,000

Threfore % marup of profit on variable cost: Desired profits/ Variable cost *100 = 160,000 /400,000*100 =40%