Kristina Alley owns a home inspection business, offering her services to homeown

Question

Kristina Alley owns a home inspection business, offering her services to homeowners. She currently charges $180 per inspection but wants to know if her fee should be raised. She is interested in an analysis of the appropriateness of her current price. She has provided the following data from the past six months:

Month Number of Inspections Overhead Costs
March 50 $3,280
April 64 3,555
May 76 3,789
June 90 4,044
July 97 4,101
August 110 4,120

Kristina takes her daughter with her on all inspections and pays her $40 per inspection. Kristina estimates an average 60 inspections per month for the next six months.

1. Prepare an analysis showing Kristina

Explanation / Answer

1. Prepare an analysis showing Kristina’s estimated total cost per inspection

    High                        110           $4,120
    Low                         50            $3,280
    Variable costs          60              $840
    Variable costs per unit            $840 / 60 = $14 per inspection
    Fixed costs = $3,280 – (50 x $14) = $2,580

     Estimated cost per inspection based on average 60 inspection per month
     Variable costs = (60 x $14) =               $840
    Fixed costs                                      $2,580  
    Total costs                                      $3,420
     Total cost per inspection $3,420 / 60 = $57
     
2. Determine Kristina’s breakeven point
     
     Contribution margin = $180 $40 - $14 = $126
     $2,580 / $126 = 20.50 or say 21 inspections

3. Determine number of inspections per month Kristina must do to generate a profit of $5,000 per
    month.
   
   Contribution margin = $180 - $40 - $14 = $126
   ($2,580 + $5,000) / $126 = 60.15 or say 60 inspections
           
4. Determine the number of inspections per month Kristina must do to generate a profit of $100 per
    month.

   Contribution margin = $180 - $40 - $14 = $126
   ($2,580 + $100) / $126 = 21.2 or say 21 inspections

5. Determine the price the Kristina would have to charge to generate a profit of $100 per inspection if she does 60 inspections per month

Total costs = (60 x $54) + $2,580    =      $5,820
Add : profit 60 x $100                           $6,000
Sales                                                   $11,820   
Selling price $11,820 / 60 = $197 per inspection

6. Determine the price that Kristina would have to charge to generate a profit of $100 per inspection if she does 50 inspections per month.

Total costs = (50 x $54) + $2,580    =      $5,280
Add : profit 50 x $100                          $5,000
Sales                                                   $10,280   
Selling price $10,280 / 50 = $205.60 per inspection

7. Determine the price that Kristina would have to charge to generate a profit of $100 per inspection if she does 75 inspections per month

Total costs = (75 x $54) + $2,580    = $6,630
Add : profit 75 x $100                         $7,500
Sales                                                   $14,130   
Selling price $14,130 / 75 = $188.40 per inspection

8. Determine the price that Judith would have to charge to generate a profit of $5,000 per month plus $100 per inspection if she does 75 inspections per month.

Total costs = (75 x $54) + $2,580    = $6,630
Add : profit (75 x $100) + $5,000     $12,500
Sales                                                   $19,130   
Selling price $19,130 / 75 = $255 per inspection

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