Alameda Tile sells products to many people remodeling their

Alameda Tile sells products to many people remodeling their homes and thinks that it could profitably offer courses on tile installation, which might also increase the demand for its products. The basic installation course has the following (tentative) price and cost characteristics: Tuition $ 800 per student Variable costs (tiles, supplies, and so on) 480 per student Fixed costs (advertising, salaries, and so on) 160,000 per year Required: a. What enrollment will enable Alameda Tile to break even? b. How many students will enable Alameda Tile to make an operating profit of $80,000 for the year? c. Assume that the projected enrollment for the year is 800 students for each of the following (considered independently): 1. What will be the operating profit (for 800 students)? 2. What would be the operating profit if the tuition per student (that is, sales price) decreased by 10 percent? Increased by 20 percent? 3. What would be the operating profit if variable costs per student decreased by 10 percent? Increased by 20 percent? 4. Suppose that fixed costs for the year are 10 percent lower than projected, whereas variable costs per student are 10 percent higher than projected. What would be the operating profit for the year?

Solution

Answer a. BEP (In Units) = Fixed Cost / Contribution per Unit Contribution per Student = $800 - (Tution fees) - $480 (Variable Costs) Contribution per Student = $320 BEP (In Units) = $160,000 / $320 BEP (In Units) = 500 students Answer b. BEP (In Units + Target Profit) = (Fixed Cost + Target Profit) / Contribution per Unit BEP (In Units + Target Profit) = ($160,000 + $80,000) / $320 BEP (In Units + Target Profit) = 750 students Answer c-1. Tution Revenue - 800 Students X $800      640,000.00 Less: Variable Costs - 800 Students X $320      256,000.00 Contribution      384,000.00 Less: Fixed Costs      160,000.00 Operating Profit      224,000.00 Answer c-2. Tution Fees Decreased by 10% Increased By 20% Tution Revenue Case 1 - 800 Students X $720      576,000.00 Case 2 - 800 Students X 960    768,000.00 Less: Variable Costs - 800 Students X $320      256,000.00    256,000.00 Contribution      320,000.00    512,000.00 Less: Fixed Costs      160,000.00    160,000.00 Operating Profit      160,000.00    352,000.00 Answer c-3. Variable Costs Decreased by 10% Increased By 20% Tution Revenue - 800 Students X $800      640,000.00    640,000.00 Less: Variable Costs Case 1 - 800 Students X $288      230,400.00 Case 2 - 800 students X $384    307,200.00 Contribution      409,600.00    332,800.00 Less: Fixed Costs      160,000.00    160,000.00 Operating Profit      249,600.00    172,800.00 Answer 4. Tution Revenue - 800 Students X $800      640,000.00 Less: Variable Costs - 800 Students X $320 X 110%      281,600.00 Contribution      358,400.00 Less: Fixed Costs - $160,000 X 90%      144,000.00 Operating Profit      214,400.00