Problem:
Hometown Bank is determining the price for its newest mini debit card. The card can be used at any retail outlet with a swipe reader and is small enough to attach to a key chain - no PIN number or signature is required. Sigrid Olmo has developed the following annual information for use in upcoming price determination meetings:
Variable processing costs $ 50 million
Fixed processing costs 36 million
Selling expenses (fixed) 10 million
General and administrative expenses (fixed) 4 million
Desired profit 3 billion
Cost of assets employed 10 billion
Annual usage is expected to be 10 billion transactions.
On average, the company now earns a 6 percent return on assets.
1. Compute the projected cost of one transaction.
2. Using gross margin pricing, compute the price to charge per transaction.
3. Using return on assets pricing, compute the price to charge per transaction.