Question

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 8 percent first-year return (profit) on the firm’s $18,100,000 asset investment. Although the normal return in MPE’s industry is 10 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: 23,000

Anticipated variable cost per service hour: $22.50

Anticipated fixed cost: $1,930,000 per year

2. How much profit must MPE generate in the first year to achieve a(n) 8 percent return?

	Target profit

3. Calculate the revenue per hour that MPE must generate in the first year to achieve a(n) 8 percent return. (Round your answer to 2 decimal places.)

	Revenue per hour

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) 10 percent return in year 2. If the competitive pressures dictate a maximum selling price of $170 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 10 percent return?

2. 	Target profit

3. Calculate the revenue per hour that MPE must generate in the second year to achieve a 10 percent return.

4. 	Revenue per hour

Answer 1

1)Profit to be achieved for 8% return for first year?

Asset investment X return %

$18100000 x 8% = $ 1448000 (Target profit)

2) Target Revenue per Hour

Targeted total revenue= estimated profit + fixed cost per year + total variable cost

= $1448000 +1930000(given)+ $517500 (23000 X 22.5) = $3895500

Revenue per hour = Total revenue/estimated hour = $3895500/23000= $169.37 per hour

3)Profit to be achieved for 10% return for second year?

Asset investment X return %

$18100000 x 10% = $ 1810000

4)Target Revenue per Hour

Targeted total revenue= estimated profit + fixed cost per year + total variable cost

= $1810000 +1930000(given)+ $517500 (23000 X 22.5) = $4257500

Revenue per hour = Total revenue/estimated hour = $4257500/23000= $185.11 per hour

due to competition maximum selling price in second year is 170 per hour company could not achieve target profit. to achieve target profit per hour rate is $185.11