home mortgage inc s primary business is processing mortgage loan applications 544681

Planning Future Sales for a Service Business

Home Mortgage Inc.’s primary business is processing mortgage loan applications. Last year, Jenna Jason, the manager of the mortgage application department, established a policy of charging a $500 fee for every loan application processed. Next year’s variable costs have been projected as follows: mortgage processor wages, $30 per hour (a mortgage application takes 3 hours to process); supplies, $10 per application; and other variable costs, $15 per application. Annual fixed costs include depreciation of equipment, $5,000; building rental, $34,000; promotional costs, $45,000; and other fixed costs, $20,000.

Required

1. Using the contribution margin approach, compute the number of loan applications the company must process to (a) break even and (b) earn a profit of $50,000.

2. Using the same approach and assuming promotional costs increase by $5,400, compute the number of applications the company must process to earn a profit of $60,000.

3. Assuming the original information and the processing of 500 applications, compute the loan application fee the company must charge if the targeted profit is $40,000.

4. Jason’s staff can handle a maximum of 750 loan applications. How much more can be spent on promotional costs if the highest fee tolerable to the customer is $400, if variable costs cannot be reduced, and if the targeted profit for the loan applications is $50,000?