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Florida Temps, a large labor contractor, supplies contract labor to building- construction companies. For 2012 , Florida Temps has budgeted to supply 84,000 hours of contract labor. Its variable costs are \(\$ 13\) per hour, and its fixed costs are \(\$ 168,000\). Roger Mason, the general manager, has proposed a cost-plus approach for pricing labor at full cost plus \(20 \%\) 1\. Calculate the price per hour that Florida Temps should charge based on Mason's proposal. 2\. The marketing manager supplies the following information on demand levels at different prices: $$\begin{array}{cc} \text { Price per Hour } & \text { Demand (Hours) } \\ \hline \$ 16 & 124,000 \\ 17 & 104,000 \\ 18 & 84,000 \\ 19 & 74,000 \\ 20 & 61,000 \end{array}$$ Florida Temps can meet any of these demand levels. Fixed costs will remain unchanged for all the demand levels. \(0 n\) the basis of this additional information, calculate the price per hour that Florida Temps should charge to maximize operating income. 3\. Comment on your answers to requirements 1 and 2. Why are they the same or different?

Step by step solution

01

Calculate Total Costs

To determine the price per hour using a cost-plus approach, first calculate the total costs. Variable costs are \(84,000 \times \\(13 = \\)1,092,000\). Fixed costs are \(\\(168,000\). Therefore, total costs are: \(1,092,000 + 168,000 = \\)1,260,000\).

02

Calculate Cost Per Hour

Divide the total costs by the total hours to find the cost per hour: \(\frac{1,260,000}{84,000} = \$15\) per hour.

03

Calculate Price Using Cost-Plus

Under Mason's proposal, add 20% to the cost per hour: \(\\(15 \times 1.20 = \\)18\) per hour. This is the price Florida Temps should charge according to Mason's proposal.

04

Analyze Demand Levels

Review the provided demand levels at different prices. The goal is to maximize operating income, not just cover costs. Notice that demand for different price points varies drastically.

05

Calculate Revenue and Profit

Calculate potential revenue and profit at each price point by multiplying the price per hour by demand hours and subtracting total costs (\(\$1,260,000\)). The price that yields the highest profit is ideal.

06

Identify Optimal Price

After calculating for all price points, at \(\\(18\), the revenue is \(84,000 \times \\)18 = \\(1,512,000\) and profit is \(1,512,000 - 1,260,000 = \\)252,000\). This is higher than profits at other prices, confirming \(\$18\) is optimal.

07

Comment on Findings

Mason’s proposed cost-plus pricing of \(\$18\) is also the optimal price for maximizing income given the demand information. This alignment means that maximizing operating income and covering costs coincide at this price point.

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Fixed and Variable Costs

Understanding the financial obligations of a business can start with identifying its costs. Costs come in two flavors: fixed and variable. Fixed costs are consistent and do not change with the level of goods or services produced, such as rent, salaries, and insurance. In the case of Florida Temps, their fixed costs amount to $168,000. Variable costs, on the other hand, shift depending on the volume of production or services provided. For Florida Temps, every hour of labor supplied incurs a variable cost of $13. By understanding the distinction between these costs, a business can better forecast its expenses and understand its financial position. Identifying these costs is the first step in determining the total cost of operations.

Operating Income Maximization

Maximizing operating income means achieving the highest possible profit after covering all operating costs. For a company like Florida Temps, it's essential to select a pricing strategy that not only covers costs but also optimizes profitability. One approach to achieve this is to compare revenues at different pricing levels. Each pricing structure affects demand and subsequently, the total hours worked. Florida Temps' calculations show that by setting their price at $18 per hour, they can maximize their operating income. This price point allows them to achieve the highest profit of $252,000 even after subtracting their total costs.

Demand Analysis

Demand analysis involves understanding how different price points affect consumer behavior and purchasing decisions. This analysis is crucial in developing a successful pricing strategy. Florida Temps observed varying demand at different hourly rates:

• $16 per hour results in demand for 124,000 hours
• $18 per hour results in demand for 84,000 hours
• $20 per hour results in demand for 61,000 hours

By calculating the revenue generated at each level, Florida Temps can choose the price point that maintains demand while maximizing revenue. Understanding demand helps in predicting future trends and making informed business decisions.

Price Optimization

Price optimization is finding the perfect balance between pricing, cost, and demand to ensure maximum profitability. The goal is to determine the price point where income is maximized without significantly reducing demand. In the Florida Temps case, price optimization was achieved at $18/hour. At this rate, they managed to perfectly balance their costs with the demand at that level, maximizing the company's profitability. Price optimization is more than just setting a cost figure on services; it's a strategic decision that demands careful analysis and understanding of market dynamics. It ensures that a business can withstand market fluctuations and remain profitable.