Gibson Academy is a profit-oriented education business. Gibson provides remedial training for high school students who have fallen behind in their classroom studies. It charges its students $1,275 per course. During the previous year, Gibson provided instruction for 1,000 students. The income statement for the company follows:
Revenue | $ | 1,275,000 | |
Cost of instructors | (850,000 | ) | |
Overhead costs | (270,000 | ) | |
Net income | $ | 155,000 | |
The company president, Andria Rossi, indicated in a discussion with
the accountant, Sam Trent, that she was extremely pleased with the
growth in the area of computer-assisted instruction. She observed
that this department served 200 students using only two part-time
instructors. In contrast, the classroom-based instructional
department required 32 instructors to teach 800 students. Ms. Rossi
noted that the per-student cost of instruction was dramatically
lower for the computer-assisted department. She based her
conclusion on the following information:
Gibson pays its part-time instructors an average of $25,000 per
year. The total cost of instruction and the cost per student are
computed as follows:
Type of Instruction | Computer-Assisted | Classroom | |||||
Number of instructors (a) | 2 | 32 | |||||
Number of students (b) | 200 | 800 | |||||
Total cost (c = a × $25,000) | $ | 50,000 | $ | 800,000 | |||
Cost per student (c ÷ b) | $ | 250 | $ | 1,000 | |||
Assuming that overhead costs were distributed equally across the
student population, Ms. Rossi concluded that the cost of
instructors was the critical variable in the company’s capacity to
generate profits. Based on her analysis, her strategic plan called
for heavily increased use of computer-assisted instruction.
Mr. Trent was not so sure that computer-assisted instruction should
be stressed. After attending a seminar on activity-based costing
(ABC), he believed that the allocation of overhead cost could be
more closely traced to the different types of learning activities.
To facilitate an activity-based analysis, he developed the
following information about the costs associated with
computer-assisted versus classroom instructional activities. He
identified $192,000 of overhead costs that were directly traceable
to computer-assisted activities, including the costs of computer
hardware, software, and technical assistance. He believed the
remaining $78,000 of overhead costs should be allocated to the two
instructional activities based on the number of students enrolled
in each program.
Required
Based on the preceding information, determine the total cost and the cost per student to provide courses through computer-assisted instruction versus classroom instruction. (Do not round intermediate calculations. Round "Cost per student" to 2 decimal places.)
Computer Assisted | Classroom | |
Cost of Instructors | 50,000 | 800,000 |
Overhead Costs: | ||
Directly Traceable costs | 192,000 | 0 |
Remaining | 15,600 | 62,400 |
Total Cost | 257,600 | 862,400 |
Number of students | 200 | 800 |
Cost per Student | 1,288 | 1,078 |
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