Rosemont Tennis is planning for the coming year. Investors would like to earn a 13% return on the company's $23245058 million of assets. The company primarily incurs fixed costs to maintain the tennis courts. Fixed costs are projected to be $10755370 for the year. About 500,000 court time hours are expected to be played each year. Variable costs are about $5 per hour of court time. The Rosemont Country Club and Tennis Courts has a favorable reputation in the area and therefore, has some control over the price per hour of court time. Using a cost-plus approach, what price should Rosemont Tennis charge for an hour of court time?

Question

Cheddar

Business

27 December, 22:46

Rosemont Tennis is planning for the coming year. Investors would like to earn a 13% return on the company's $23245058 million of assets. The company primarily incurs fixed costs to maintain the tennis courts. Fixed costs are projected to be $10755370 for the year. About 500,000 court time hours are expected to be played each year. Variable costs are about $5 per hour of court time. The Rosemont Country Club and Tennis Courts has a favorable reputation in the area and therefore, has some control over the price per hour of court time. Using a cost-plus approach, what price should Rosemont Tennis charge for an hour of court time?

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Jamal Hull · Answer 1

The price charged per hour should be $32,55

Explanation: The cost-plus approach is based on this formula Price (P) = (Overall cost per unit) * (1 + markup) So we need to get Overall cost per unit and markup. The overall costs is the sum of the fixed cost divided by the total amount of court hours ($10.755.370 / 500.000h = $21,51), plus the variable cost per hour ($5). Then, our total cost is $26,51. The markup is the expected return on assets per hour divided by total costs per hour [ ($23.245.058 * 13% / 500.000) / $26,51] = 0,228. Then, the markup per hour is 22,8%. Using the cost-plus approach we get: P = 26,51 * (1 + 0,228) = $33,55 per court hour