Metro Transit is determining the price for its newest prepaid fare card. The fare card can be used at any transportation station or retail outlet-no PIN number or signature is required. The following annual information has been developed for use in upcoming price determination meetings:
Variable processing costs................................. $40 million
Fixed processing costs........................................ 4 million
Selling expenses (fixed)....................................... 4 million
General and administrative expenses (fixed).............. 2 million
Desired profit................................................ 90 million
Cost of assets employed....................................... 5 billion
Annual usage is expected to be 5 billion transactions. On average, the company now earns a 5 percent return on assets.
1. Compute the projected cost of one transaction.
2. Using gross margin pricing, compute the price to charge per transaction.
3. Using return on assets pricing, compute the price to charge per transaction.