Your firm designs training materials for computer training classes, and you have just received a request to bid on a contract to produce a complete set of training manuals for an 8-session class. From previous experience, you know that your firm follows a 90% learning rate. For this contract, it appears that the effort will be substantial, running 400 hours for the first session. Your firm has an average cost of labor of $60/hour and the overhead is expected to run a fixed $1000 per session. The customer will pay you a flat fixed rate per session (Per Session Price.) If your profit markup is 12%, what will be the Total Price, the Per Session Price, and at what session will you break even? Answer the following four questions: What is the Total Price? This is what you would charge the customer so that you can have your profit markup of 10% over all of your costs. To calculate this, first figure out your cost per each session, add them up, and then add your profit. What is the Per Session Price? This is the revenue that the customer pays you each time you finish a session. It is calculated by dividing the Total Price by the number of sessions. What is the Break-Even Point? In the beginning, your cost per session is more than your revenue per session. As each session is completed, however, your costs for the session declines so that eventually your cumulative revenue exceeds the cumulative cost. The break-even point is the session at which, for the first time, your revenue exceeds your cost. Assume you win the contract and your customer likes the training so much, she orders a ninth course at the same price as the first eight. What will your profit be on the 9th course?

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter3: Cost Behavior

Section: Chapter Questions

Problem 23E: Bordner Company manufactures HVAC (heating, ventilation, and air conditioning) systems for...

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Your firm designs training materials for computer training classes, and you have just received a request to bid on a contract to produce a complete set of training manuals for an 8-session class. From previous experience, you know that your firm follows a 90% learning rate. For this contract, it appears that the effort will be substantial, running 400 hours for the first session. Your firm has an average cost of labor of $60/hour and the overhead is expected to run a fixed $1000 per session. The customer will pay you a flat fixed rate per session (Per Session Price.) If your profit markup is 12%, what will be the Total Price, the Per Session Price, and at what session will you break even?

Answer the following four questions:

What is the Total Price? This is what you would charge the customer so that you can have your profit markup of 10% over all of your costs. To calculate this, first figure out your cost per each session, add them up, and then add your profit.
What is the Per Session Price? This is the revenue that the customer pays you each time you finish a session. It is calculated by dividing the Total Price by the number of sessions.
What is the Break-Even Point? In the beginning, your cost per session is more than your revenue per session. As each session is completed, however, your costs for the session declines so that eventually your cumulative revenue exceeds the cumulative cost. The break-even point is the session at which, for the first time, your revenue exceeds your cost.
Assume you win the contract and your customer likes the training so much, she orders a ninth course at the same price as the first eight. What will your profit be on the 9^th course?

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