Question

Thornton Training Services (TST) 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 TST incurs is instructor salaries; it pays instructors $5,200 per course taught. TST recently agreed to offer a course of instruction to the employees of Novak Incorporated at a price of $440 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

a) cost of instruction $5200 is a Fixed cost

because cost of $5200 is per course taught irrespective of the number of students attending the course

b) Revenue = $8800 ($440*20)

Less cost = $5200

profit = $3600

c) Revenue = $9680 ($440*22)

less :cost = $5200

profit =$4480

change in profitability = ((4480-3600) / 3600 )* 100

= 24.4%

d) Revenue = $7920 ($440*18)

less:cost =$5200

profit = $2720

change in profitability = ($2720-3600) / 3600 *100

= -24.4%

10% decrease in enrollement will lead to negative profitability