Chapter 2, Problem 21PSB

1)a.

To determine

Whether the cost of instruction is fixed or variable cost

Explanation of Solution

The cost of instruction is fixed cost as the total cost $7,500 remains constant irrespectively of number of C Courses candidates attends the courses

b.

To determine

Determine the profit

Explanation of Solution

Table (1)

c.

To determine

Determine the profit and 10% of increase in enrolment.

Explanation of Solution

Excel spreadsheet:

Table (2)

Percentage change in revenue and profitability:

$\begin{array}{c}\text{Percentage change in profitability}=\frac{\text{G}\text{.P}\text{. }\left(\text{55candidates}\right)-\text{G}\text{.P}\text{. }\left(\text{50candidates}\right)}{\text{G}\text{.P}\text{. in }\left(\text{50candidates}\right)}\\ =\frac{\$14,500-\$12,500}{\$12,500}\\ =16\%\end{array}$

Hence, the percentage change in profitability is 16%.

Percentage change in revenue:

$\begin{array}{c}\text{Percentage change in revenue}=\frac{\text{Revenue }\left(55\text{candidates}\right)-\text{Revenue }\left(50\text{candidates}\right)}{\text{Revenue }\left(50\text{candidates}\right)}\\ =\frac{\$22,000-\$20,000}{\$20,000}\\ =10\%\end{array}$

Hence, the percentage change in revenue is 10%.

d.

To determine

Determine the profit and 10% of decrease in enrolment.

Explanation of Solution

Determine the profit:

Table (3)

Percentage change in revenue and profitability:

$\begin{array}{c}\text{Percentage change in profitability}=\frac{\text{G}\text{.P}\text{. }\left(\text{50candidates}\right)-\text{G}\text{.P}\text{. }\left(\text{45candidates}\right)}{\text{G}\text{.P}\text{.}\left(\text{50candidates}\right)}\\ =\frac{\$12,500-\$10,500}{\$12,500}\\ =16\%\end{array}$

Hence, the percentage change in profitability is 16%.

$\begin{array}{c}\text{Percentage change in revenue}=\frac{\text{Revenue (}50\text{candidates)}-\text{Revenue in }\left(\text{45candidates}\right)}{\text{Revenue }\left(\text{50candidates}\right)}\\ =\frac{\$20,000-\$18,000}{\$20,000}\\ =10\%\end{array}$

Hence, the percentage change in revenue is 10%.

e.

To determine

The reason for 10% shift in enrollment produces more than 10% shift in profitability and the term identifies this phenomenon.

Explanation of Solution

The term which identifies these phenomena is operating leverage. This causes the percentage change in profitability to higher than the percentage change in revenue.

This is because that the fixed cost remains same and covered and there is no variable cost. So each additional dollar of revenue pays directly to the profitability.

2)f.

To determine

Whether the cost of instruction is fixed or variable cost

Given information:

The fee per candidate is $150.

Explanation of Solution

The cost of instruction is variable cost as the total cost varies respectively of number of candidates attends the courses

g.

To determine

Determine the profit

Explanation of Solution

Table (4)

h.

To determine

Determine the profit and 10% of increase in enrolment.

Explanation of Solution

Excel spreadsheet:

Table (5)

Percentage change in revenue and profitability:

$\begin{array}{c}\text{Percentage change in profitability}=\frac{\text{G}\text{.P}\text{. in }\left(\text{55candidates}\right)-\text{G}\text{.P}\text{. in }\left(\text{50candidates}\right)}{\text{G}\text{.P}\text{. in }\left(\text{50candidates}\right)}\\ =\frac{\$13,750-\$12,500}{\$12,500}\\ =10\%\end{array}$

Hence, the percentage change in profitability is 10%.

$\begin{array}{c}\text{Percentage change in revenue}=\frac{\text{Revenue in }\left(\text{55candidates}\right)-\text{Revenue in}\left(\text{50candidates}\right)}{\text{Revenue in }\left(\text{50candidates}\right)}\\ =\frac{\$22,000-\$20,000}{\$20,000}\\ =10\%\end{array}$

Hence, the percentage change in revenue is 10%.

i.

To determine

Determine the profit and 10% of decrease in enrolment.

Explanation of Solution

Excel spreadsheet:

Table (6)

Excel workings:

Table (7)

Percentage change in revenue:

$\begin{array}{c}\text{Percentage change in profitability}=\frac{\text{G}\text{.P}\text{.}\left(\text{50candidates}\right)-\text{G}\text{.P}\text{.}\left(\text{45candidates}\right)}{\text{G}\text{.P}\text{. in }\left(\text{50candidates}\right)}\\ =\frac{\$12,500-\$11,250}{\$12,500}\\ =10\%\end{array}$

Hence, the percentage change in profitability is 10%.

$\begin{array}{c}\text{Percentage change in revenue}=\frac{\text{Revenue}\left(\text{50candidates}\right)-\text{Revenue}\left(\text{45candidates}\right)}{\text{Revenue in }\left(\text{50candidates}\right)}\\ =\frac{\$20,000-\$18,000}{\$18,000}\\ =10\%\end{array}$

Hence, the percentage change in revenue is 10%.

j.

To determine

The reason for 10% shift in enrollment produces relative 10% shift in profitability.

Explanation of Solution

The change in profit is relative to change in revenue because the revenue as well as cost changes relatively to the change in number of candidates attending the course.

3)k.

To determine

The total cost and the cost per candidate

Explanation of Solution

The formula to calculate the cost per candidate:

$\text{Cost per candidate}=\frac{\text{Total cost}}{\text{Number of candidate}}$

Compute the total cost:

Table (8)

Compute the cost per candidate:

Table (9)

l.

To determine

Whether the cost of work book is fixed or variable cost

Explanation of Solution

The cost of work book is fixed cost as the cost incurred is before the sale of work book. Therefore, sales of number of work book will not affect the total cost.

Thus, it is fixed cost.

m.

To determine

The risk of holding inventory as it applies to workbooks

Explanation of Solution

The risk faced by the company is that it produces very few or too many books. If the company produces too many books then the expenses will more due to wastage.

When the company produces less numbers then the will not get the opportunity to earn any additional profits.

It will also incur costs like maintenances, interest and storage.

n.

To determine

Whether just in time can reduce the cost and risk of holding inventory

Explanation of Solution

JIT-Just in time produces only when there is any demand of goods. There will not be any risk on over or under production.

There will not be any stock piling of inventory as it will avoid the cost of storage, interest and maintenance