'Cost-plus and market-based pricing. (CMA, adapted) Best Test Laboratories evaluates the reaction of materials to extreme increases in temperature. Much of the company’s early W—--growth was attributable to government contracts. Recent growth has come from diversifi¬

cation and expansion into commercial markets. Environmental testing at Best Test now includes:

Heat testing (HTT) Arctic condition testing (ACT)

Air turbulence testing (ATT) Aquatic testing (AQT)

Stress testing (SST)

Currently, all of the budgeted operating costs are collected in a single overhead pool.

.All of the estimated testing hours are also collected in a single pool. One rate per test-hour is used for all five types of testing. This hourly rate is marked up by 45% to recover administra¬

tive costs, taxes, and profit in the selling price.

Rick Shaw, Best Test’s controller, believes that there is enough variation in the test pro¬

cedures and cost structure to establish separate costing and billing rates. He also believes that the inflexible rate structure currently being used is inadequate in today’s competitive environ¬

ment. After analyzing the following data, he has recommended new rates for Best Test’s upcoming fiscal year.

The budgeted total test laboratory costs for the coming year are Test pool labour (10 employees) $ 504,000 Supervision 86,400 Equipment amortization 214,152 Heat 204,000 Electricity 148,800 Water 88,800 Setup 69,600 Indirect materials 124,800 Operating supplies 74,400 Total test lab costs $1,514,952 Total estimated test-hours 106,000 Shaw has determined the resource usage by test type in the following table:
HIT ATT SST ACT AQT Test pool labour employees 3 2 2 1 2 Supervision 40% 15% 15% 15% 15%
Amortization $57,876 $26,400 $47,076 $38,400 $44,400 Heat 50% 5% 5% 30% 10%
Electricity 30% 10% 10% 40% 10%
Water — — 20% 20% 60%
Setup 20% 15% 30% 15% 20%
Indirect materials 15% 15% 30% 20% 20%
Operating supplies 10% 10% 25% 20% 35%
Test-hours 29,680 12,720 27,560 22,260 13,780 Competitors’ hourly billing rates $ 21.00 $ 22.80 $ 18.60 $ 19.20 $ 24.00 Required 1. Compute the single pool hourly cost and hourly billing rate for Best Test Laboratories.
2. Compute the five separate hourly billing rates for Best Test Laboratories.
3. Discuss what effect the new cost-plus method will have on the pricing structure for each of the five test types. Given the competitors’ hourly billing rates, how might Best Test mod¬
ify its pricing?
4. In general, identify at least three other internal or external factors that influence pricing structure.