PRACTICE EXERCISES 1. Notown Recording Studio rents studio time to musicians in

Question

PRACTICE EXERCISES 1. Notown Recording Studio rents studio time to musicians in 2-hour blocks. Each ses- sion includes the use of the studio facilities, a digital recorded CD of the performance, and a professional music producer/mixer. Anticipated annual volume is 1,000 sessions. The company has invested $2,300,000 in the studio and expects a return on investment (ROI) of 15%. Budgeted costs for the coming year are as follows Use cost-plus pricing to determine various amounts (LO2) Total Per Session $ 20 $400 $ 50 Direct materials (CDs, etc.) Direct labor Variable overhead Fixed overhead Variable selling and administrative expenses Fixed selling and administrative expenses $950,000 $ 40 $540,000 Instructions (a) Determine the total cost per session. (b) Determine the desired ROI per session (c) Calculate the markup percentage on the total cost per session. (d) Calculate the target p rice per session

Explanation / Answer

Part a)

The total cost per session is determined as below:

_____

Part b)

The desired ROI per session is calculated as follows:

Desired ROI Per Session = (Total Investment in Studio*Expected ROI)/Total Annual Sessions

Using the values provided in the question in the above formula, we get,

Desired ROI Per Session = (2,300,000*15%)/1,000 = $345

_____

Part c)

The value of markup percentage on the total cost per session is arrived as below:

Markup Percentage on Total Cost Per Session = Desired ROI Per Session/Total Cost Per Session*100 = 345/2,000*100 = 17.25%

_____

Part d)

The target price per session is calculated as below:

Target Price Per Session = Total Cost Per Session*(1+Markup Percentage on Total Cost Per Session) = 2,000*(1+17.25%) = $2,345

Direct Materials 20 Direct Labor 400 Variable Overhead 50 Fixed Overhead (950,000/1,000) 950 Variable Selling and Administrative Expenses 40 Fixed Selling and Administrative Expenses (540,000/1,000) 540 Total Cost Per Session $2,000

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