Texas has just passed a law making it mandatory to

Texas has just passed a law making it mandatory to have every head of cattle inspected at least once a year for a variety of communicable diseases. Big Springs Enterprises is considering entering this inspection business. After extensive studies, Tex Autry, the owner of Big Springs Enterprises, has developed the following annual projections:

Direct service labor ...............$525,000

Variable service overhead costs .......... 250,000

Fixed service overhead costs ........... 225,000

Selling expenses ................ 142,500

General and administrative expenses ......... 157,500

Minimum desired profit .............. 120,000

Cost of assets employed .............. 750,000

Autry believes his company could inspect 250,000 head of cattle per year. On average, the company now earns a 16 percent return on assets.

1. Compute the projected cost of inspecting each head of cattle.

2. Determine the price to charge for inspecting each head of cattle. Use gross margin pricing.

3. Using return on assets pricing, compute the unit price to charge for this inspection service.

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