St. John's Temps, a large labour contractor, supplies contract labour to building-construction companies. For 2015, St. John's Temps has budgeted to supply 80,000 hours of contract labour. Its variable costs are $12 per hour, and its fixed costs are $240,000. Roger Mason, the general manager, has proposed a cost-plus approach for pricing labour at full cost plus 20%.
Required
1. Calculate the price per hour that St. John's Temps should charge based on Mason's proposal.
2. The marketing manager supplies the following information on demand levels at different prices:
Price per Hour Demand (Hours)
$16 ........................... 120,000
17 ............................. 100,000
18 .............................. 80,000
19 .............................. 70,000
20 .............................. 60,000
St. John's Temps can meet any of these demand levels. Fixed costs will remain unchanged for all the demand levels. On the basis of this additional information, calculate the price per hour that St. John's Temps should charge to maximize operating income.
3. Comment on your answers to requirements 1 and 2. Why are they the same or different?