Problem: Former G.E. Chairman Jack Welch is highly sought after as a guest speaker. His fee can run as high as $100,000 for a single two-hour appearance. Recently, he was asked to speak at a seminar offered by the National Education Foundation (NEF). Due to the charitable nature of the organization, Mr. Welch offered to speak for $75,000. NEF planned to invite 250 guests who would each make a $500 contribution to the organization. The Foundation's executive director was concerned about committing so much of the organization's cash to this one event. So instead of the $75,000 fee she countered with an offer to pay Mr. Welch 50% of the revenue received from the seminar and no other payments.
a) Classify the two offers in terms of cost behavior (fixed vs. variable).
b) Compute the budgeted income (assuming there are no other expenses) under each of the following scenarios:
1) NEF agrees to pay the $75,000 fee and 250 guests actually attend the seminar; and
2) NEF pays Mr. Welch 50% of revenue and 250 guests attend the seminar.
c) For each scenario ($75,000 fee vs. 50% of revenue), compute the percentage increase in profit that would result if the Foundation is able to increase attendance by 20 percent over the original plan (to a total of 300).
d) Explain how the two proposals affect NEF's potential profit from the seminar.