Question

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.
(a) If the company desires a profit of $140,000, what should it charge per hour?
$Answer
(b) What is the markup on variable costs if the desired profit is $160,000?
Answer %
(c) 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

(a) If the company desires a profit of $140,000, it should charge $22 per hour. This is calculated by adding the desired profit to the variable costs, resulting in $20 + $140,000 = $160,000. Then, divide this amount by the total number of consulting hours (20,000) to get $22 per hour.

(b) The markup on variable costs if the desired profit is $160,000 is 25%. This is calculated by dividing the desired profit ($160,000) by the variable costs ($20) and then subtracting 1, resulting in (160,000/20) - 1 = 7.5. Multiply this amount by 100 to get the markup percentage (7.5 x 100 = 750%).

(c) If the desired profit is $160,000, the markup on variable costs to cover unassigned costs and desired profit is 33%. This is calculated by dividing the desired profit plus unassigned costs ($400,000 + $160,000 = $560,000) by the variable costs ($20) and then subtracting 1, resulting in (560,000/20) - 1 = 27.5. Multiply this amount by 100 to get the markup percentage (27.5 x 100 = 2750%).

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