Rosemont Tennis is planning for the coming year.Investors would like to earn a 12% return on the company's $25 million of assets.The company primarily incurs fixed costs to maintain the tennis courts.Fixed costs are projected to be $12,500,000 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

Quizplus · Accepted Answer

To determine the cost-plus price, we need to add the desired return on assets to the total cost per hour of court time:

Total cost per hour of court time = Fixed cost per year / Number of court time hours per year + Variable cost per hour
Total cost per hour of court time = $12,500,000 / 500,000 + $5
Total cost per hour of court time = $30 per hour

Desired return on assets = 12% x $25,000,000 = $3,000,000

Cost-plus price = Total cost per hour of court time + Desired return on assets / Number of court time hours per year
Cost-plus price = $30 + $3,000,000 / 500,000
Cost-plus price = $36 per hour

Therefore, the best choice is B) $36.00.

Rosemont Tennis Is Planning for the Coming Year