Question

Solomon Training Services (STS) 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 STS incurs is instructor salaries; it pays instructors $5,600 per course taught. STS recently agreed to offer a course of instruction to the employees of Novak Incorporated at a price of $420 per student. Novak estimated that 20 students would attend the course. students would attend the Base your answers on the preceding information Base van Required a. Relative to the number of students in a single course, is the cost of instruction a cost? b. Determine the profit, assuming that 20 students attend the course. c. Determine the profit, assuming a 10 percent increase in enrollment (le, enrollment increases to 22 students). What is the percentage change in profitability? d. Determine the profit, assuming a 10 percent decrease in enrollment (l.e., enrollment decreases to 18 students). What is the percentage change in profitability?

Answer 1

Answer -

a. Answer -

The cost of instruction is a Variable cost.

Explanation:

Variable cost changes in proportion to goods produces or services given, but fixed cost remains same at relevant range of production or services.

Here, cost of instruction changes in proportion to number of students in a single course.

Therefore, relative to the number of students in a single course, is the cost of instruction a variable cost.

b. Answer -

Profit = $2800

Calculation:

Revenue:

= Enrollment * Price per student

= 20 students * $420 per student

= $8400

Therefore,

Profit:

= Revenue - Total expense (Instructor salaries)

= $8400 - $5600

= $2800

c. Answer -

Profit = $3640

Change in profitability = 30%

Calculation:

Before any assumption,

Revenue:

= Enrollment * Price per student

= 20 students * $420 per student

= $8400

Therefore,

Profit:

= Revenue - Total expense (Instructor salaries)

= $8400 - $5600

= $2800

After assuming a 10% increase in enrollment i.e. enrollment increases to 22 students.

So,

Revenue:

= Enrollment * Price per student

= 22 students * $420 per student

= $9240

Therefore,

Profit:

= Revenue - Total expense (Instructor salaries)

= $9240 - $5600

= $3640

So,

Change in profitability:

= ($3640 - $2800) / $2800

= 0.30 or 30%

d. Answer -

Profit = $1960

Change in profitability = -30%

Calculation:

Before any assumption,

Revenue:

= Enrollment * Price per student

= 20 students * $420 per student

= $8400

Therefore,

Profit:

= Revenue - Total expense (Instructor salaries)

= $8400 - $5600

= $2800

After assuming a 10% decrease in enrollment i.e. enrollment decreases to 18 students.

So,

Revenue:

= Enrollment * Price per student

= 18 students * $420 per student

= $7560

Therefore,

Profit:

= Revenue - Total expense (Instructor salaries)

= $7560 - $5600

= $1960

So,

Change in profitability:

= ($1960 - $2800) / $2800

= -0.30 or -30%