International Finance Incorporated issues letters of credit to importers for overseas purchases. The company charges a nonrefundable

Question:

International Finance Incorporated issues letters of credit to importers for overseas purchases. The company charges a nonrefundable application fee of $3,000 and, on approval, an additional service fee of 2 percent of the amount of credit requested. The firm’s budget for the year just completed included fixed expenses for office salaries and wages of $500,000, leasing office space and equipment of $50,000, and utilities and other operating expenses of $10,000. In addition, the budget also included variable expenses for supplies and other variable overhead costs of $1,000,000. The company estimated these variable overhead costs to be $2,000 for each letter of credit approved and issued. The company approves, on average, 80 percent of the applications it receives. During the year, the company received 600 requests and approved 75 percent of them. The total variable overhead was 10 percent higher than the standard amount applied; the total fixed expenses were 5 percent lower than the amount budgeted. In addition to these expenses, the company paid a $270,000 insurance premium for the letters of credit issued. The insurance premium is 1 percent of the amount of credits issued in U.S. dollars. The actual amount of credit issued often differs from the amount requested due to fluctuations in exchange rates and variations in the amount shipped from the amount ordered by importers. The strength of the dollar during the year decreased the insurance premium by 10 percent.

Application fee	$3,000
Add'l service fee (revenue)	2%
Budgeted FC:
Office salaris	$500,000
Leasing costs	$50,000
Utilities and other	$10,000
Budgeted VC	$1,000,000
VC/approved appl	$2,000
Approval %	80%

ACTUAL RESULTS:
Applications received	600
Approval rate	75%
Excess VC rate	10%
Reduction in FC	5%
Insurance premium	$270,000
Ins. Premium rate	1%	of credit issued
Exchange rate effect	10%