Question

Franklin Training Services (FTS) 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 FTS incurs is instructor salaries; it pays instructors $6,000 per course taught. FTS recently agreed to offer a course of instruction to the employees of Novak Incorporated at a price of $700 per student. Novak estimated that 20 students would attend the course.

a. Relative to the number of students in a single course, is the cost of instruction a fixed or a variable cost?

b. Determine the profit, assuming that 20 students attend the course.

c. Determine the profit, assuming a 10 percent increase in enrollment (i.e., enrollment increases to 22 students). What is the percentage change in profitability?

d. Determine the profit, assuming a 10 percent decrease in enrollment (i.e., enrollment decreases to 18 students). What is the percentage change in profitability?

e. Explain why a 10 percent shift in enrollment produces more than a 10 percent shift in profitability. Use the term that identifies this phenomenon.

Answer 1

FTS's cost of instruction is a fixed cost and a 10% change in enrollment results in more than a 10% change in profitability due to operating leverage. The profit calculations for different enrollments show that the change in the number of students impacts profitability significantly.

Step-by-step explanation:

The cost of instruction provided by Franklin Training Services (FTS) is considered a fixed cost relative to the number of students in a single course. This is because FTS incurs a constant expense of instructor salaries regardless of the number of students enrolled in the course. Now, let's calculate the profit using the information provided:

• For 20 students: Profit = (20 students x $700) - ($6,000 instructor salary) = $14,000 - $6,000 = $8,000.
• For a 10% increase to 22 students: Profit = (22 students x $700) - ($6,000 instructor salary) = $15,400 - $6,000 = $9,400. The percentage change in profit = (($9,400 - $8,000) / $8,000) x 100 = 17.5%.
• For a 10% decrease to 18 students: Profit = (18 students x $700) - ($6,000 instructor salary) = $12,600 - $6,000 = $6,600. The percentage change in profit = (($6,600 - $8,000) / $8,000) x 100 = -17.5%.

A 10 percent shift in enrollment produces more than a 10 percent shift in profitability due to operating leverage, as the fixed costs remain constant while the revenue per student changes.

Answer 2

Step-by-step explanation:

a.) The cost of instruction is Variable cost relative to the number of students in a single course . As the instructors are paid on student basis @$700 per student in course

b.) Assuming the number of students are 20, Total Income is $700*20= $14,000

Total Expense is $6,000

Profit of $14,000-$6,000= $8,000

c.) Enrollment increases by 10% to 22 students

Total Income will rise to $700*22= $15,400

Profit of $15,400-$6,000= $9,400. It is $1,400 more than before.

d.) Enrollment decreases by 10% to 18 students

Total Income falls to $700*18= $12,600

Profit of $12,600-$6000= $6,200