Question

State Street Lending processes loan applications. The manager of the loan department has established a policy of charging a $250 fee for every loan application processed. Variable costs have been projected as follows: loan consultant’s wages, $15.50 per hour (a loan application takes 5 hours to process); supplies, $2.40 per application; and other variable costs, $5.60 per application. Annual fixed costs include depreciation of equipment, $8,500; building rental, $14,000; promotional costs, $12,500; and other fixed costs, $8,099

Required
1. Using the contribution margin approach, compute the number of loan applications the company must process to
(a) Break even
(b) Earn a profit of $14,476.
2. Using the same approach and assuming promotional costs increase by $5,662, compute the number of applications the company must process to earn a profit of $20,000.
3. Assuming the original information and the processing of 500 applications, compute the loan application fee the company must charge if the targeted profit is $41,651.
4. The maximum number of loan applications that the department can process is 750. How much more can be spent on promotional costs if the highest fee tolerable to the customer is $280, if variable costs cannot be reduced, and if the targeted profit is $50,000?



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  • CreatedMarch 26, 2014
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