Effects of fixed and variable cost behavior on the risk and rewards of business opportunities
Eastern and Western Universities offer executive training courses to corporate clients. Eastern pays its instructors $5,310 per course taught. Western pays its instructors $295 per student enrolled in the class. Both universities charge executives a $340 tuition fee per course attended.
Required
a. Prepare income statements for Eastern and Western, assuming that 18 students attend a course.
b. Eastern University embarks on a strategy to entice students from Western University by lowering its tuition to $220 per course. Prepare an income statement for Eastern, assuming that the university is successful and enrolls 36 students in its course.
c. Western University embarks on a strategy to entice students from Eastern University by lowering its tuition to $220 per course. Prepare an income statement for Western, assuming that the university is successful and enrolls 36 students in its course.
d. Explain why the strategy described in Requirement b produced a profit but the same strategy described in Requirement c produced a loss.
e. Prepare income statements for Eastern and Western Universities, assuming that 15 students attend a course, assuming that both universities charge executives a $340 tuition fee per course attended.
f. It is always better to have fixed than variable cost. Explain why this statement is false.
g. It is always better to have variable than fixed cost. Explain why this statement is false.
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