Brian Smith is an internationally known American professor specializing in consumer marketing. In, 2005 Smith and the United Kingdom Business School (UKBS) agreed to conduct a one-day seminar at UKBS for marketing executives. Each executive would pay £260 to attend the one-day seminar.

The dean at UKBS indicated to Smith that the non-speaker related fixed costs for UKBS conducting the seminar would be:

Advertising in magazines .............................£4,000

Mailing of brochures ....................................£3,000

Administrative labor at UKBS .....................£2,000

Charge for UKBS lecture auditorium ..........£1,000

The variable costs to UKBS for each participant attending the seminar would be:

Meals and drinks ............................£25

Binders and photocopying..............£35

The dean at UKBS initially offered Smith its regular compensation package of (a) business-class airfare and accommodation (£3,000 maximum) and (b) a £2,000 lecture fee. Smith would qualify for the £3,000 maximum allowance. Smith views the £2,000 lecture fee as providing him no upside potential (that is, no sharing in the potential additional operating income that arises if the seminar is highly attended). He suggests instead that he receive 50% of the operating income to UKBS (if positive) from the one-day seminar and no other payments. The dean of UKBS quickly agrees to Smith’s proposal after confirming that Smith is willing to pay his own airfare and accommodation and deliver the seminar irrespective of the number of executives signed up to attend.

REQUIRED

a. What is UKBS’s breakeven point (in number of executives attending) if

1. Smith accepts the regular compensation package of £3,000 expenses and a £2,000 lecture fee

2. Smith receives 50% of the operating income to UKBS (if positive) from the one-day seminar and no other payments. Why are the results for (1) and (2) different? Explain.

b. Smith gave the one-day seminar at UKBS in 2005 (60 attended), 2006 (90 attended), and 2007 (180 attended). How much was Smith paid by UKBS for the one-day seminar under the 50% of UKBS’s operating income compensation plan in the three years? (Assume that the £260 charge per executive attending and UKBS is fixed and variable costs are the same each year).

c. After the 2007 seminar, the dean at UKBS suggested to Smith that the 50%- 50% profit-sharing plan was resulting in Smith getting excessive compensation in 2007 and that a more equitable arrangement to UKBS be used in 2008. How should Smith respond to this suggestion? There is no need for calculations. There is no unique answer.