Iowa has just passed a law making it mandatory to have every chicken inspected at least once a year for a variety of communicable diseases. Cluck Enterprises is considering entering this inspection business. After extensive studies, Cluck's owner has developed the following annual projections:
Direct service labor............................................. $275,000
Variable service overhead costs................................. 25,000
Fixed service overhead costs.................................... 200,000
Selling expenses.................................................. 100,500
General and administrative expenses............................ 59,500
Minimum desired profit......................................... 100,000
Cost of assets employed ........................................800,000
The owner believes his company could inspect 2,000,000 chickens per year. On average, the company now earns a 6 percent return on assets.
1. Compute the projected cost of inspecting each chicken.
2. Using gross margin pricing, determine the price to charge for inspecting each chicken.
3. Using return on assets pricing, compute the unit price to charge for this inspection service.