Question

Required information Problem 2-21A Effects of operating leverage on profitability LO 2-2, 2-3 [The following information applies to the questions displayed below.] Zachary Training Services (ZTS) 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 ZTS incurs is instructor salaries; it pays instructors $5,600 per course taught. ZTS recently agreed to offer a course of instruction to the employees of Novak Incorporated at a price of $430 per student. Novak estimated that 20 students would attend the course. Base your answers on the preceding information. Problem 2-21A Part 2 The instructor has offered to teach the course for a percentage of tuition fees. Specifically, she wants $250 per person attending the class. Assume that the tuition fee remains at $430 per student. f. Is the cost of instruction a fixed or a variable cost? g. Determine the profit, assuming that 20 students take the course. h. Determine the profit, assuming a 10 percent increase in enrollment (i.e., enrollment increases to 22 students). What is the percentage change in profitability? i. Determine the profit, assuming a 10 percent decrease in enrollment (i.e., enrollment decreases to 18 students). What is the percentage change in profitability? Complete this question by entering your answers in the tabs below. Required F Required G Required H Required I Is the cost of instruction a fixed or a variable cost? The cost of instruction is a Variable cost Required E Required G >

Answer 1

F) The cost of instruction was a fixed cost when ZTS paid salary to the instructor $ 5,600 per course taught , because instruction cost doesn't depends on number of students enrollment .

But when ZTS made a contract with instructor to teach a course for a percentage of tuition fees, then cost of instruction become variable cost. Because it is depending upon tuition fees which is variable on the number of students enrollment .

G) Total tuition fees received = $ 430 X 20 students = $ 8,600

Instructions cost = $ 250 X 20 students = $ 5,000

Net profit = $ 8,600 - $ 5,000 = $ 3,600

H) If 22 students enrolled ( 10% increased enrollment)

Then , total tuition fees received = $ 430 X 22 students = $ 9,460

Instruction cost = $ 250 X 22 students = $ 5,500

Net profit = $ 9,460 - $ 5,500 = $ 3,960

Change in profitability = [change in current profit / previous profit] X 100

Change in profit =[ { $ 3,960 - $ 3,600} / $ 3,600 ] X 100 = 10%

I) If 18 students enrolled (10 % deceased in enrollment)

Then, total tuition fees received = $ 430 X 18 = $ 7,740

Instruction cost = $ 250 X 18 = $ 4,500

Net profit = $ 7,740 - $ 4,500 = $ 3,240

Change in profit ability = [ change in current profit / previous profit ] X 100

Change in profitability = [ ( $ 3,240 - $ 3,600) / $ 3,600] X 100 = ( 10%)