Question

Question 3 D'Mortgage's primary business is processing mortgage loan applications. In 20X1, the manager of D'Mortgage's loan department established a policy of charging $300 fee for every loan application processed. 20X2's costs have been projected as follows: Variable costs: Loan consultant's salaries: $18 per hour (a loan application takes 5 hours to process) Supplies: $3.60 per application Other variable costs: $6.40 per application Annual fixed costs Depreciation of equipment: $9,200 Building rental: $15,500 Promotional costs: $13,500 Other fixed costs: $9,800.

Answer 1

Calculation of contribution per apllication Amount (in $) 300 Price charged per application Less: Variable Costs: Consultant's salaries (5hrs x $ 18 per hour) Supplies Other variable costs Contribution per unit 200 Total Fixed costs: Depreciation of equipment Building rent Promotional costs Other fixed costs Total 9200 15500 13500 9800 48000 A (0) Break even quantity: Break even quantity = (Total fixed cost / Contribution per unit) = 48000 / 200 = 240 No.of applications to break even = 240 (ii) Number of applications required to earn profit of $ 16,000: No.of applications required = [(Total Fixed Cost + Required profit) / Contribution per unit) = [(48000 + 16000) / 200) 320 No.of applications required = 320 B Required application charge: No.of applications = [(Total Fixed Cost + Required profit)/(X-Variable cost)] 500 = [(48000 + 56000)/(X-100)] 500X-50000 = 104000 500X = 154000 X = 308 Applications Charge = 308 C Promotional Costs as balancing figure: Maximum no.of applications 750 Highest fee tolerable 310

Variable Costs per unit Contribution per unit 100 210 Total Contribution (210 X 750) Less: Targeted profit Balance for Fixed Costs Less: Total Fixed costs (Given) 157500 90000 67500 48000 19500 Maximum more amount that can be spent on promotional costs = $ 19,500 (Other than the given $ 13,500) Total promotional costs = $ 13,500 + $ 19,500 = $ 33,000. D Promotional Costs as balancing figure: Increased loan applications 1000 Total Fixed costs Less: Promotional costs Add: Promotional costs Revised Total Fixed costs 48000 13500 7000 41500 (i) Outsource the applications: Fee per application Courier service fee Variable cost per unit 250 20 270 Assumed that under outsourcing option the company need not to incur the regular variable cost as given. Calculation of contribution per apllication Price charged per application Less: Variable cost per unit Contribution per unit 350 270 80 Incremental contribution under outsourcing = $ 80 X 250 units = $20,000 (ii) Process applications in-house: Increased fixed costs 20000 Price charged per application Less: Increased Variable cost per unit (100 X 130%) 350 130

Revised Contribution per unit 220 55000 Total Contribution (250 units X $ 200) Less: Increased fixed costs Incremental contribution 20000 35000 Incremental contribution under processing applications in-house = $ 35000 Since under in-house processing contribution is more option (ii) is preferred The company need to consider operational feasibility for processing the additional units. The company also need to consider the quality of output from the Fast Mortgage.