Tidbit Corporation uses target costing and will soon enter a very competitive marketplace in which it will have limited influence over the prices that are charged.
Management and consultants are working to fine-tune the company's sole service, which hopefully will generate a 15% return (profit) on the firm's $30,000,000 asset investment.
The following information is available:
|
Hours of service to be provided |
$ 125,000 |
|
|
Anticipated variable cost per service hour |
$ 200 |
|
|
Anticipated fixed cost |
$ 2,750,000 |
annually |
Required:
A. How much profit must Tidbit produce to achieve a 15% return?
B. Calculate the revenue per hour thatTidbit must generate to achieve a 15% return.
C. Assume that prior to entering the marketplace, management conducted a planning exercise to determine whether a 20% return could be attained in year Two.
Can the company achieve this return if (a) competitive pressures dictate a maximum selling price of $265 per hour and (b) service hours, variable cost per service hour,
and fixed costs are the same as the amounts anticipated in year no. 1? Show calculations.
D. If your answer to part "C" is "no," suggest and briefly describe a procedure that Argosy might use to achieve desired results.
Attachment:- Exam.xls