Reference no: EM132627364

WBI board is discussing how much a business advisor should charge per hour of service. WBI has budgeted to supply 300,000 hours of business advisory service for the forthcoming year. Its variable cost is estimated at $35 per hour and its fixed costs are estimated at $4,000,000 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:

Table 1 - Demand levels

Price per hour            Demand in hours

$64                        310,000

$65                        300,000

$66                       280,000

$67                       270,000

$68                    250,000

Required

Question a) Calculate the price per hour WBI should charge based on a cost-plus approach for pricing the service at full cost plus 35%.

Question b) Considering WBI can meet any demand level in Table 1 and that fixed costs will remain unchanged for all the preceding demand levels, what price per hour should WBI charge based on demand levels?

Question c) State one benefit of the cost-plus approach and one benefit of the demand levels approach applied to WBI and, between the two approaches, which approach should WBI board choose for long-term planning of the business advisory service and why?