Question 1: Your firm designs training materials for computer training classes,

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Question 1: 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 an 85% learning rate. For this contract, it appears that the effort will be substantial, running 100 hours for the first session. Your firm bills at the rate of $100/hour and the overhead is expected to run a fixed $600 per session. The customer will pay you a flat fixed rate per session (Per Session Price.) If your profit markup is 15%, what will be the Total Price, the Per Session Price, and at what session will you break even? Answer the following three questions: a. What is the Total Price? This is what you would charge the customer so that you can have your profit markup of 15% over all of your costs. To calculate this, first figure out your cost per each session, add them up, and then add your profit. b. What is the Per Session Price? This is the revenue that the customer pays you each time you complete a session. It is calculated by dividing the Total Price by the number of sessions. c. What is the Break Even Point? At the beginning, your cost per session is more than your revenue per session. Gradually, your cumulative revenue matches the cumulative cost, and eventually exceeds it so that you can end up with the desired profit. The break-even point is the session at which, for the first time, your revenue exceeds your cost.

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Explanation / Answer

Solution:

Activity : To Designs training materials for computer training classes

Recently received a request to bid on a contract to produce a complete set of training manuals for an 8-session class.

Past fig.

85% learning rate. ( For this contract, it appears that the effort will be substantial )

Running 100 hours for the first session.

Firm bills at the rate of $100/hour

Overhead = fixed $600 per session

The customer will pay a flat fixed rate per session (Per Session Price.)

Profit markup is 15%,

Total Price (Per Session Price ) = ?

Break even = ?

There are 8 sessions .

Learning curve : 85 %

For 1st session = 100 hours

As per learning curve , next 7 sessions can be at the rate of 85 % .

So sessions hours will be = 100 * 85 % = 85 hours

(a)

Total cost = 1 + 2 + 3 +------+8 sessions + over head for 8 sessions

= (100 * 100) +(85*100) *7 + (8 * 600 ) = $ 74300

Profit = 15 % on total cost

= 15 % * 74300 = $14860

Total Revenue = $ 74300 + $14860 = $ 89160

(b)

Approximate Price per sessions = $ 89160 / 8 = $11145

(c)

Point for Break Even = 74300 / 11145 = 6.66 session

At 6.66 session revenue will cross the cost.

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