Question

Problem 9-45 CVP Analysis; Strategy; Critical Success Factors [LO 9-1, 9-2, 9-3] Garner Strategy Institute (GSI) presents executive-level training seminars nationally. Eastern University (EU) has approached GSI to present 40 one-week seminars during 2019. This activity level represents the maximum number of seminars that GSI is capable of presenting annually. GSI staff would present the week-long seminars in various cities throughout the United States and Canada. Terry Garner. GSi's president, is evaluating three financial options for the revenues from Eastern: accept a flat fee for each seminar, receive a percentage of Eastern's profit before tax from the seminars, and form a joint venture to share costs and profits. Estimated costs for the 2019 seminar schedule follow: Garner Strategy Institute Eastern University N/A* $206,000 62,000 N/A* Fixed costs for the year: Salaries and benefits Facilities Travel and hotel Other Total fixed costs Variable cost per participant: Supplies and materials Marketing Other site costs 50,000 $318,000 $ 297,600 N/A* $ 297,600 47 *Eastern's fixed costs are excluded because the amounts are not considered relevant for this decision (i.e., they will be incurred whether or not the seminars are presented). Eastern does not include these costs when calculating the profit before tax for the seminars. EU plans to charge $1,200 per participant for each 1-week seminar. It will pay all variable marketing, site costs, and materials costs. Required 1. Assume that the seminars are handled as a joint venture by GSI and EU to pool costs and revenues. a. Determine the total number of seminar participants needed to break even on the total costs for this joint venture. b. Assume that the joint venture has an effective income tax rate of 30%. How many seminar participants must the joint venture enroll to earn an after-tax income of $183,141? 2. Assume that GSI and EU do not form a joint venture, but that GSI is an independent contractor for EU. EU offers two payment options to GSI: a flat fee of $9,500 for each seminar or a fee of 40% of EU's profit before taxes from the seminars. Compute the minimum number of participants needed for GSi to prefer the 40% fee option over the flat fee. Complete this question by entering your answers in the tabs below.

Answer 1

Answer :-

1a). Break Even Point = Fixed Costs / Contribution Margin

Fixed cost = Total Fixed cost of Garner strategy institute +Total Fixed cost of Eastern University

Fixed cost = $318,000 + $297,600 = $615,600

Contribution Margin = Charge per participant - Variable cost per participant

Contribution Margin = $1200 - ($47 + $ 18 + $ 35 )

Contribution Margin = $1,100

Break even point = $615,000/ $1,100

Break even point = 560

Total no. of seminar participant needed to break even is 559 per year

1)b)Break even number =  (Fixed costs + Target Operating  Profit )/Contribution margin

Target operating profit = After tax income / (1 - tax rate)

After tax income = $183,141

Tax rate = 30%

Target operating profit = $183,141 /(1 -30%) = $261,630

Break even number = ($615,600 + $261,630) / $1100

Break even number = 797 per year

Required number of Participants is 797 per year

2)Offer 1 -

Fees per seminar = $ 9,500

No.of seminar = 40 seminar during 2019

GSI total flat fee = $ Fees per seminar × No. of seminar

GSI total flat fee = $9,500 × 40 = $380,000

Offer 2 -

A fees of 40% of EU's profit before taxes

GSI fees = 40% x [(contribution margin x number of participants) -fixed cost of EU)

Let no.of Participants be n

GSI fees = 40% × [( 1100 × n ) - $ 297,600]

GSI fees = 40% (1100n - $297,600)

GSI fees = 440n - $119,040

GSI fees for both the offer is same then equation is

$380,000 = 440n - $119,040

$380,000 + $119,040 = 440n

$499,040 /440 = n

No.of participant (n) = 1134 participant

Maximum number of seminar participant = 1134 participant