Texas has just passed a law making it mandatory to have every head of cattle ins

Question

Texas has just passed a law making it mandatory to have every head of cattle inspected at least once a year for a variety of communicable diseases. Big Springs Enterprises is considering entering this inspection business. After extensive studies, Tex Autry, the owner of Big Springs Enterprises, has developed the following annual projections:
Direct service labor $525,000
Variable service overhead costs 250,000
Fixed service overhead costs 225,000
Selling expenses 142,500
General and admin expenses 157,500
Minimum desired profit 120,000
Cost of assets employed 750,000
Autry believes his company could inspect 250,000 head of cattle per year. On average, the company now earns a 16 percent return on assets.
1. Compute the projected cost of inspecting each head of cattle
2. Determine the price to charge for inspecting each head of cattle. Use gross margin pricing.
3. Using return on assets pricing, compute the unit price to charge for this inspection service.

Explanation / Answer

Name of the Cost

$

Direct service Labor

525000

Variable service Over head cost

250000

Fixed service over head

225000

Selling Expenses

142500

Genareal and adminstrative Expenses

157500

Total cost

1300000

Target profit

$120000

Target cost

$1420000

Name of the Cost $ Direct service Labor 525000 Variable service Over head cost 250000 Fixed service over head 225000 Selling Expenses 142500 Genareal and adminstrative Expenses 157500 Total cost 1300000

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