Astro, Inc. 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 12% return (profit) on the firm's $24,000,000 asset investment. The following information is available:Hours of service to be provided: 34,000Anticipated variable cost per service hour: $30Anticipated fixed cost: $2,560,000 per yearRequired:A. How much profit must Astro produce to achieve a 12% return?B. Calculate the revenue per hour that Astro must generate to achieve a 12% return.C. Assume that prior to entering the marketplace, management conducted a planning exercise to determine whether a 14% return could be attained

Question

in year no. 2. Can the company achieve this return if (a) competitive pressures dictate a maximum selling price of $195 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 Astro might use to achieve desired results.

What will be an ideal response?

Answer 1

A. Astro's target profit is $2,880,000 ($24,000,000 × 12%).
B. Total revenues must be sufficient to cover costs and produce the target profit. Thus, revenues equal $6,460,000 [(34,000 hours × $30) + $2,560,000 + $2,880,000]. The revenue per hour must be $190 ($6,460,000 ÷ 34,000 hours).
C. Astro's target profit is $3,360,000 ($24,000,000 × 14%). Total revenues must equal $6,940,000 [(34,000 hours × $30) + $2,560,000 + $3,360,000], and the revenue per hour must be $204.12 ($6,940,000 ÷ 34,000 hours).
No. A 14% return requires that Astro produce revenue per service hour of $204.12, which is in excess of the $195 maximum market price.
D. To achieve a 14% return and a $195 revenue-per-hour figure, the company must trim its costs. Astro could use value engineering, a technique that utilizes information collected about a service's design and associated processes. The goal is to examine the design and processes and then identify improvements that would produce cost savings.