Question

You run a school in Florida. Fixed monthly cost is $5,644.00 for rent and utilities, $6,057.00 is spent in salaries and $1,616.00 in insurance. Also every student adds up to $90.00 per month in stationary, food etc. You charge $647.00 per month from every student now.You are considering moving the school to another neighborhood where the rent and utilities will increase to $10,636.00, salaries to $6,878.00 and insurance to $2,230.00 per month. Variable cost per student will increase up to $185.00 per month. However you can charge $1,167.00 per student. At what point will you be indifferent between your current mode of operation and the new option

Answer 1

The indifference point is 15 students.

Step-by-step explanation:

Giving the following information:

Current location:

Total fixed costs= 5,644 + 6,057 + 1,616= $13,317

Contribution margin per student= 647 - 90= $557

New location:

Total fixed costs= 10,636 + 6,878 + 2,230= $19,744

Contribution margin per student= 1,167 - 185= $982

First, we need to structure the total income formula for each location:

Current location= 557x - 13,317

New location= 982x - 19,744

x= number of students

Now, we equal both formulas and isolate x:

557x - 13,317 = 982x - 19,744

425x = 6,427

x= 15.122 = 15 students

The indifference point is 15 students.

Prove:

Current location= 557*15 - 13,317= (4,962)

New location= 982*15 - 19,744= (5,014)

The difference is due to round up.