Question

You run a school in Florida. Fixed monthly cost is $5,424.00 for rent and utilities, $6,082.00 is spent in salaries and $1,492.00 in insurance. Also every student adds up to $99.00 per month in stationary, food etc. You charge $614.00 per month from every student now. You are considering moving the school to another neighborhood where the rent and utilities will increase to $11,624.00, salaries to $6,454.00 and insurance to $2,270.00 per month. Variable cost per student will increase up to $177.00 per month. However you can charge $1,122.00 per student. At what point will you be indifferent between your current mode of operation and the new option?

Answer 1

Current option:

Total fixed cost = 5,424+6,082+1,492 = 12,998

Contribution margin = revenue per student - variable cost per student = 614-99 = 515

Proposed option:

Total fixed cost = 11,624+6,454+2,270 = 20,348

Contribution margin = 1,122-177 = 945

For the point of indifference, if number of students is n then

Profit from current option = profit from proposed option

where profit = Contrbution margin*n - total fixed cost

515n - 12,998 = 945n-20,348

n = 17.09 or 18 students.

At this number of students, both options will give the same profit value.

Note: The breakeven point for current option is 26 and for proposed option is 22, so actually the point of indifference is actually resulting in a loss for both options.