Question 2 Sherry Holmes is the CEO of Competent Training, a company that provides managerial development courses. The company offers two training packages: (i) Package Alpha: Two-day short courses covering topics such as communication skills, leadership skills and change management. (ii) Package Beta: Five-day courses in areas such as strategic management, project management and developing performance measurement systems. Package Alpha is conducted by junior consultants who are paid $200 per hour (7 hours per day) whereas Package Beta is conducted by senior consultants who are paid $300 per hour (7 hours per day). Package Beta is technically more demanding and participants are expected to have some basic understanding of the subject matters. In view of that, participants are required to complete one pre-course assignment before courses begin. Consultants are paid $20 per assignment review. At the end of the year, Sherry reviewed the company's total costs with a view to setting prices for the coming year. Over the past 12 months, the company ran 40 Package Alpha courses, with an average of 50 participants in each course, and 60 Package Beta courses, with an average of 30 participants in each course. A cost-plus pricing model with a 50% markup on total cost is used to compute the course prices. Before setting prices for next year, Sherry decides to consult her best friend, Sherlock, who works as a management consultant in a top-rated consulting firm. Sherlock does not approve of Competent Training's traditional method of allocating common costs, which is based on the cost driver "number of course) days". Sherlock suggests that activity-based costing would provide a more accurate estimate of the common costs to be allocated to the two types of training courses, resulting in more accurate pricing. With Sherlock's help, Sherry identified the following activities and costs for the past year. Activity Activity driver Activity cost Advertisement Administration Premise rental Equipment rental Handouts Lunches Number of courses Number of participants Number of days Number of days Number of participants Number of participant-days $125,000 $19,000 $38,000 $95,000 $38,000 $195,000 Quantity of activity driver 100 3,800 380 380 3,800 13,000 Required (a) Using the activity-based costing approach, compute the costs of a Package Alpha course and a Package Beta course. Workings should be detailed and clearly presented. (21 marks) (b) Based on the costs in (a) above, compute the price (per participant) to be charged for a Package Alpha course and a Package Beta course. Workings should be detailed and clearly presented. (4 marks) (c) For a company such as Competent Training, do you agree with Sherlock that the activity-based costing approach would result in more accurate pricing than the traditional costing approach? Why or why not? Discuss and support your standpoint with clear and concise arguments. (9 marks) (d) Competent Training is facing intense market competition for the Alpha courses and has been losing market share steadily. Sherlock advised Sherry to conduct a market survey to find out what prices are being charged by competitors. The survey results revealed that similar two-day courses are priced at an average of $200. Sherry is contemplating on how Competent Training can match the market price without sacrificing its existing profit margin. What should Competent Training do if it decides to continue offering the Alpha courses and be competitive in its pricing? Discuss and show detailed calculations (round off figures to the nearest dollar) to support your position. (6 marks)
