Question

XYZ Company, LLC, plans to offer professional marketing services to engineers and scientists who have developed new technology they wish to bring to market. XYZ expects to have an average payroll cost per hour of $51.50 and monthly fixed costs of $3,450.

1. How much per hour should XYZ charge its customers if it wishes to achieve a 55% margin?

2. How much per hour should XYZ charge its customers if it wishes to achieve a 65% margin?

3. If XYZ feels it can charge its customers no more than $135 per hour, and it wants to maintain a margin of 65%, to what amount does XYZ need to reduce its average payroll cost per hour?

4. Considering the price and variable cost from Q#3, how many hours of marketing services must XYZ sell each month in order to breakeven?

5. Suppose XYZ wishes to make a profit of $12,500 per month at a price of $135 per hour and a margin of 70%. How many hours of marketing services does XYZ need to sell per month?

Answer 1

Variable cost per hour = $51.50

1. How much per hour should XYZ charge its customers if it wishes to achieve a 55% margin?

Selling price to be charged = $51.50 x 155% = $79.825

2. How much per hour should XYZ charge its customers if it wishes to achieve a 65% margin?

Selling price to be charged = $51.50 x 165% = $84.975

3. If XYZ feels it can charge its customers no more than $135 per hour, and it wants to maintain a margin of 65%, to what amount does XYZ need to reduce its average payroll cost per hour?

Selling price = $135

Margin = 65%

Margin per hour = $135 x 65% = $87.75

Average payroll cost per hour = Selling Price - Margin$ = $135 - $87.75 = $47.25

4. Considering the price and variable cost from Q#3, how many hours of marketing services must XYZ sell each month in order to breakeven?

Breakeven hours = Fixed Costs / Margin per hour = $3,450 / $87.75 = 39.30 hours

5. Suppose XYZ wishes to make a profit of $12,500 per month at a price of $135 per hour and a margin of 70%. How many hours of marketing services does XYZ need to sell per month?

Required Profit = Required Contribution - Fixed Costs

Required Contribution = $12,500 + $3,450 = $15,950

Required Contribution = Contribution margin x Required no. of hours

Required no. of hours = $15,950 / ($135 x 70%) = 168.78 hours