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MPE, Inc. will soon enter a very competitive marketplace in which it will have limited influence over the prices that are charged. Management and consultants are currently working to fine-tune the company’s sole service, which hopefully will generate a 12 percent first-year return (profit) on the firm’s $17,100,000 asset investment. Although the normal return in MPE’s industry is 14 percent, executives are willing to accept the lower figure because of various start-up inefficiencies. The following information is available for first-year operations:

Hours of service to be provided: 25,000

Anticipated variable cost per service hour: $21.40

Anticipated fixed cost: $1,840,000 per year

4. Assume that prior to the start of business in year 1, management conducted a planning exercise to determine if MPE could attain a(n) 14 percent return in year 2. If the competitive pressures dictate a maximum selling price of $176 per hour and service hours and the variable cost per service hour are the same as the amounts anticipated in year 1, calculate the following amounts to determine if this return can be achieved.

1. How much profit must MPE generate in the second year to achieve a 14 percent return?
2. Calculate the revenue per hour that MPE must generate in the second year to achieve a 14 percent return.
3. Can the company achieve this return?

Answer 1

Req a:
Investment made			17100000
Multipy: Rate of return			14%
target return			2394000
Req b:
Fixed cost			1840000
Add: profit			2394000
Contribution			4234000
Divide: Hour			25000
CM per hour			169.36
Add Variable cost per hour			21.4
Revenue per houour required			190.76
Req c:
No, the company cannot be able t o achieve desired return.
As revenue charged $ 176 is less than $ 190.76