Question

Alma’s Recording Studio rents studio time to musicians in 2-hour blocks. Each session includes the use of the studio facilities, a digital recording of the performance, and a professional music producer/mixer. Anticipated annual volume is 1,000 sessions. The company has invested $2,316,000 in the studio and expects a return on investment (ROI) of 20%. Budgeted costs for the coming year are as follows.

		Per Session			Total
Direct materials (CDs, etc.)		$ 20
Direct labor		$395
Variable overhead		$ 45
Fixed overhead					$945,000
Variable selling and administrative expenses		$ 35
Fixed selling and administrative expenses					$490,000

Determine the total cost per session.

Total cost

$Type your answer here

per session

  

  

Determine the desired ROI per session. (Round answer to 2 decimal places, e.g. 10.50.)

ROI

$Type your answer here

per session

  

  

Calculate the markup percentage on the total cost per session.

Markup percentage

Type your answer here

%

per session

  

  

Calculate the target price per session. (Round answer to 2 decimal places, e.g. 10.50.)

Target price

$Type your answer here

per session

Answer 1

Solution:

a) Computation of total cost per session:

Direct materials	$20
Direct labor	$395
Variable overhead	$45
Fixed overhead($945,000/1,000 sessions)	$945
Variable sellimg and administrative overheads	$35
Fixed selling and administrative overheads	$490
Total cost per session	$1,930

b) Desired ROI per sessions:

=($2,316,000*20%)/1,000 sessions

=$463.2

c) Markup percentage on total cost per session:

=$463.2/$1,930

=$24%

d)Target price per session:

=$1,930 +($1,930*24%)

=2,393.2

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