Question

Baird Training Services (BTS) 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 BTS incurs is instructor salaries; it pays instructors $5,700 per course taught. BTS recently agreed to offer a course of instruction to the employees of Novak Incorporated at a price of $480 per student. Novak estimated that 20 students would attend the course.

Base your answers on the preceding information.

Required

1. Relative to the number of students in a single course, is the cost of instruction a fixed or a variable cost?

2. Determine the profit, assuming that 20 students attend the course.

3. Determine the profit, assuming a 10 percent increase in enrollment (i.e., enrollment increases to 22 students). What is the percentage change in profitability?

4. Determine the profit, assuming a 10 percent decrease in enrollment (i.e., enrollment decreases to 18 students). What is the percentage change in profitability?

Answer 1

ANSWER:

a.   Since the total cost remains constant at $5,700 regardless of how many students attend the course, the cost of instruction is a fixed cost.

b. c. and d.

Number of Students	18	% Change	20	% Change	22
Revenue ($480 per student)	$8,640	⇐(10%)⇐	$9,600	⇒+10%⇒	$10,560
Cost of instruction (fixed)	5,700		5,700		5,700
Profit	$ 2,940	⇐(24.6%)⇐	$ 3,900	⇒+24.6%⇒	$ 4,860

      Percentage change in revenue:                                     ± $960 ÷ $9600 = ±10%

      Percentage change in profit:                                       ± $960 ÷ $3,900 = ±24.6%