Question

Special Order William A. Smith Pest Control, Inc. (WASP) currently provides pest control services to households...

Special Order

William A. Smith Pest Control, Inc. (WASP) currently provides pest control services to households in the local community. WASP has an opportunity to service 250 customers of another pest control firm that has also been selling in the community. WASP has the capacity to service 1,000 homes. WASP has an effective income tax rate of 30%. WASP’s income statement, before consideration of the new opportunity, is as follows.

Sales (750 homes at $250 per home) $187,500
Variable service costs 135,000
Contribution margin 52,500
Fixed service costs 30,000
Operating income 22,500
Income taxes 6,750
Net income $15,750

In negotiating a price for the special opportunity, at what amount should WASP set the minimum per-home price?

$Answer : minimum per-home price

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Answer #1
Variable service costs $             135,000
Divided by: number of homes                          750
Variable service costs per home $                      180
The company has sufficient capacity to provide services to the additional 250 homes. Therefore, the company charges the minimum price equals to variable cost per home of $180.
Minimum per-home price $                      180
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