Question

Amelia Hughes is a commercial helicopter pilot who plans to offer two-hour helicopter tours to various venues from her home airport in Hamilton. Tours would focus primarily on Toronto and Niagara Falls. She estimates that she should be able to sell 500 tours per year.

Amelia’s accountant suggests that she use cost-plus pricing based on the total lifetime product cost to determine a price per hour for the new service. She plans to keep the helicopter for ten years and then retire.

Amelia’s costs are as follows: Fight operating costs:

 Variable operating costs per hour: $300

 Variable overhead operating costs per hour: $25

 Fixed annual ground-related costs: $50,000 Selling and administrative costs:

 Fixed sales, general and administration per year: $150,000

 Variables sales, general and administration costs: $18 per hour

 The cost of developing the tour business would be $250,000, and the cost of abandoning the tour business, including disposal of the helicopter, is $50,000.

Amelia would like to make a 10% markup over cost.

Required:

a) What hourly rate will Amelia charge using total lifetime product cost?

b) Amelia realizes that there is currently no one in this market, so she thinks she can charge a 25% markup for Years 1 through 3, but will have to adjust down to 10% for Years 4 through 10, as she thinks she will have competition by then. What will Amelia charge for Year 2?

c) Amelia decides that she wants to see what the price would be if she considered only the direct flight costs with a 60% markup.

Answer 1

Answer for a & b

A . Hourly rate = $927.30 per hour.

B. Considering 25% markup on cost , charge per hour =$1053.75

C.

Direct cost means cost directly traced to product or service, direct cost generally include all variable cost. Here we assume all variable cost is directly traced to product therefore called as direct cost. Which includes

Initial cost - include cost of developing of business

Operating cost

Cost of abandon and disposal

Direct labour.

Therefore direct cost =

Variable operating cost+ variable overheads+variable sales, general, administration+ cost of developing+ disposal cost =

$300000+25000+18000+250000+50000= $643000

Add markup 60% on direct flight cost = $385800

Gross revenue =$ 1028800

Total no of hours =1000

Rate per hour = $1028.80

*Notes

Assumptions

1. Overhead cost considered as direct cost

2. Disposal cost is directly related to flight