Question

Effects of fixed and variable cost behavior on the risk and rewards of business opportunities LO 11-2

Kenton and Denton Universities offer executive training courses to corporate clients. Kenton pays its instructors $5,000 per course taught. Denton pays its instructors $250 per student enrolled in the class. Both universities charge executives a $450 tuition fee per course attended.


Required

Prepare income statements for Kenton and Denton, assuming that 20 students attend a course.

Kenton University embarks on a strategy to entice students from Denton University by lowering its tuition to $240 per course. Prepare an income statement for Kenton assuming that the university is successful and enrolls 40 students in its course.

Denton University embarks on a strategy to entice students from Kenton University by lowering its tuition to $240 per course. Prepare an income statement for Denton, assuming that the university is successful and enrolls 40 students in its course.

Prepare income statements for Kenton and Denton Universities, assuming that 10 students attend a course, and assuming that both universities charge executives a $450 tuition fee per course attended.

Answer 1

Answer and Explanation:

The Preparation of income statement of each point is shown below:-

A. Kenton and Denton Universities

Income Statement

Particulars Kenton Denton

Revenue (20 × $450) $9,000 $9,000

Less: Instruction fees

Per course fees $5,000

Per student fee (20 × $250) $5,000

Net income $4,000 $4,000

B. Kenton Universities

Income Statement

Particulars Kenton

Revenue (40 × $240) $9,600

Less: Instruction fees

Per course fees $5,000

Net income $4,600

C. Denton Universities

Income Statement

Particulars Denton

Revenue (40 × $240) $9,600

Less: Instruction fees

Per student fee (40 × $250) $10,000

Net income -$400

D. Kenton and Denton Universities

Income Statement

Particulars Kenton Denton

Revenue (10 × $450) $4,500 $4,500

Less: Instruction fees

Per course fees $5,000

Per student fee (10 × $250) $2,500

Net income -$500 $2,000

We simply deduct all the expenses from the revenue to arrive at net income and a net loss