ShopOnline Inc. is a small IT company that takes care of website development and IT securities for its parent companys online shopping website. The parent company is a large retailer in North American that had successfully developed an online purchase option that ships globally. To maintain simplicity, ShopOnline book all costs as overhead costs and bill the parent company quarterly. Now that the online store is running successfully, ShopOnline had freed up some capacity. During the pandemic in 2021, many small businesses are trying to convert to ecommerce and had approached to ShopOnline for website developments. To work with external clients, ShopOnline now needs to come up with a pricing system. You, as the manager at ShopOnline, determined that if they price a project at 1.25 times the cost, their pricing is competitive enough and should win the projects. (price = total cost * 1.25)

ShopOnline operates in four functions: website development, data entry for products, data collection on customer orders, and security maintenance. The total cost for 2020 is $685,240 and costs for each function are listed below.

Functions	Costs in 2020
Website Development	$300,000.00
Data entry-products	$218,400.00
Data collection-orders	$51,840.00
Security Maintenance	$115,000.00

The cost of each function is driven by different activities. The cost drivers and consumptions for 2020 are listed below.

Functions/Activities	Cost drivers	consumption in 2020
website development	engineer hours	6,000
data entry-products	number of products	7,280
data collection - orders	umber of online orders processed	17,280
security maintenance	engineer hours	2,300

Questions:

1. What is the activity-based overhead rate for each activity?

2. The parent company has a new category of products they want to put online. There are 12 new products and will require 5 hours for engineers to develop the website. What is the total cost for this project?

3. A small business owner asked you for a project quote that contains 65 products and will take engineers 600 hours to develop the website. The client also wants ShopOnline to maintain its website. It is estimated that they will receive 600 orders and require 200 hours a year for security maintenance. What is the total cost for this project? How much is the quoted price?

4. A family member heard that ShopOnline will start to take new business and had asked you to develop a new website that will take 200 hours. He told you that he could only afford $8,000 and cannot find anyone willing to do the job at this price. When you told him that the cost is more than $8,000 he asked to see your costing model. Looking at your pricing structure he asked you to reallocate a lower amount to the website development pool, so the hourly rate would be lower, and the quote will have a much lower cost. This order may ultimately result in a profit if you make the change. Answer the below questions: a. What would you do in this case? b. What have you considered to draw your conclusion in question a? (hint: consider the stakeholders, professional ethics, and your responsibilities as a manager)

5. Based on the current pricing model there is an expectation that profits will be 25% of sales. What do you suspect would happen to the profit % if sales for 2021 were to be $800,000 and what would happen to the profit % if sales were as high as $1,000,000