Question:
Effects of operating leverage on profitability Webster Training Services (WTS) provides instruction on the use of computer software for the employees of its corporate clients. It offers courses in the clients' offices on the clients' equipment. The only major expense WTS incurs is instructor salaries; it pays instructors $5,000 per course taught. WTS recently agreed to offer a course of instruction to the employees of Chambers Incorporated at a price of $400 per student. Chambers estimated that 20 students would attend the course. Base your answers on the preceding information.
Part 1:
Required
a. Relative to the number of students in a single course, is the cost of instruction a fixed or a variable cost?
b. Determine the profit, assuming that 20 students attend the course.
c. Determine the profit, assuming a 10 percent increase in enrollment (i.e., enrollment increases to 22 students). What is the percentage change in profitability?
d. Determine the profit, assuming a 10 percent decrease in enrollment (i.e., enrollment decreases to 18 students). What is the percentage change in profitability?
e. Explain why a 10 percent shift in enrollment produces more than a 10 percent shift in profitability. Use the term that identifies this phenomenon.
Part 2:
The instructor has offered to teach the course for a percentage of tuition fees. Specifically, she wants $250 per person attending the class. Assume that the tuition fee remains at $400 per student.
Required
f. Is the cost of instruction a fixed or a variable cost?
g. Determine the profit, assuming that 20 students take the course.
h. Determine the profit, assuming a 10 percent increase in enrollment (i.e., enrollment increases to 22 students). What is the percentage change in profitability?
i. Determine the profit, assuming a 10 percent decrease in enrollment (i.e., enrollment decreases to 18 students). What is the percentage change in profitability?
j. Explain why a 10 percent shift in enrollment produces a proportional 20 percent shift in profitability.
Part 3:
WTS sells a workbook with printed material unique to each course to each student who attends the course. Any workbooks that are not sold must be destroyed. Prior to the first class, WTS printed 20 copies of the books based on the client's estimate of the number of people who would attend the course. Each workbook costs $25 and is sold to course participants for $40. This cost includes a royalty fee paid to the author and the cost of duplication.
Required
k. Calculate the workbook cost in total and per student, assuming that 18, 20, or 22 students attempt to attend the course.
l. Classify the cost of workbooks as fixed or variable relative to the number of students attending the course.
m. Discuss the risk of holding inventory as it applies to the workbooks.
n. Explain how a just-in-time inventory system can reduce the cost and risk of holding inventory.