Question

Vernon Training Services (VTS) 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 VTS incurs is instructor salaries; it pays instructors $5,600 per course taught. VTS recently agreed to offer a course of instruction to the employees of Novak Incorporated at a price of $410 per student. Novak estimated that 20 students would attend the course.

Base your answers on the preceding information.

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?

Answer 1

Answer for a)

Here,I would say that cost of instruction is fixed cost as the instructor is paid $5600 per course regardless the number of students attended.

Answer for b)

Profit of 20 students attend:

Fees recieved-costs incurred

=($410×20students)-$5600

=$2600 profit

Answer for c)

Percentage of change in profit:

[(New profit-original profit)/original profit]×100

(Note: here original profit refers to profit for 20 students)

=[((($410×22students)-$5600)-$2600)/$2600]×100

=$820/$2600×100

=31.54%increase in profit.

Answer for d)

Similarly,

[((($410×18students)-$5600)-$2600)/$2600]×100

=-$820/$2600×100

=31.54% decrease in profit.