Question

You recently opened up a third-party customer service business in which companies outsource their customer service needs to your service. You invested $350,000 of capital to get the project off the ground, and are trying to determine the price you will charge for the service. You are seeking a 20% return on your investment and project that each service opportunity will carry with it a $5,000 cost to set up the account. If you project that you will work with 150 clients in the first year, what would be your pricing level for this service, using a targeted return approach?

Group of answer choices

$4,750.99

$6,689.99

$5,158.64

$6,354.58

$5,466.67

Answer 1

Compute the expected earnings on capital investment, using the equation as shown below:

Expected earnings = Capital invested*Return on investment

                               = $350,000*20%

                               = $70,000

Hence, the expected earnings on capital investment is $70,000.

Compute the total operating cost in the first year, using the equation as shown below:

Total operating cost = Number of clients*Setup cost per client

                                 = 150*$5,000

                                 = $750,000

Hence, the total operating cost in the first year is $750,000.   

Compute the price charged for service, using the equation as shown below:

Price = (Total operating cost + Expected earnings)/ Total number of clients

          = ($750,000 + $70,000)/ 150

          = $820,000/ 150

          = $5,466.67

Hence, the price charged for service is $5,466.67.