Question

Please show work:

Minnesota Financial is a subsidiary of Mayberry Enterprises. Processing loan applications is the main task of the corporation. They charge a $500 fee for every loan application processed. Next year's fixed costs have been projected as follows: sales and advertising $40,000; building rental, $18,000; Depreciation of computers and office equipment $27,000; and other fixed costs, $5,000. The projected variable costs include: loan officer’s wages, $27 per hour (a loan application takes 5 hours to process); supplies $16.40 per application; and other variable costs, $8.60 per application. (Round all answers to the closest full number)

Questions:

1. Determine the number of loan applications the company must process to (a) break even and (b) earn a profit of $50,000 (round to the closest full number).

2. Determine the number of loan applications the company must process to earn a target profit of $50,000 if fixed costs increase by $10,000.

3. Assuming the original fixed cost information and assuming that 500 loan applications are processed, compute the loan application fee the company must charge if the target profit is $75,000.

4. If 750 loan applications is the maximum number her staff can handle. How much more (less) can be spent on promotional costs if the highest fee tolerable to the customer is $600, if variable costs cannot be reduced, and if the target net income for such an application load is $100,000?

Answer 1

	Total fixed costs = 40000+18000+27000+5000 =	$            90,000
	Variable costs per application = 27*5+16.40+8.60 =	$ 160
	Contribution margin per application = 500-160 =	$ 340
1]
a]	Number of application to break even = Fixed costs/CM per application = 90000/340 =	265	applications
b]	Contribution margin required to earn a profit of $50000 = 50000+fixed costs = 50000+90000 =	$         1,40,000
	Number of applictions required to earn $50000 profit = 140000/265 =	528	applications
2]	Number of applications required = (90000+10000+50000)/340 =	441	applications
3]	Total contribution margin required = 75000+90000 =	$         1,65,000
	CM required per application = 165000/500 =	$ 330
	Sale price required per application = CM per application+variable cost per application = 330+160 =	$ 490
4]	Maximum revenue = 750*600 =	$         4,50,000
	Less: Target net income	$         1,00,000
	Total costs permitted	$         3,50,000
	Less: Total variable costs = 750*160 =	$         1,20,000
	Maximum allowable fixed costs	$         2,30,000
	Less: Existing fixed costs	$            90,000
	Maximum possible additional promotional costs	$         1,40,000