CIA Review, Inc. provides review courses twice each year for students studying to take the CIA exam. The cost of textbooks is included in the registration fee. Text material requires constant updating and is useful for only one course. To minimize printing costs and ensure availability of books on the first day of class, CIA Review has books printed and delivered to its offices two weeks in advance of the first class. To ensure that enough books are available, CIA Review normally orders 10 percent more than expected enrollment. Usually there is an oversupply and books are thrown away. However, demand occasionally exceeds expectations by more than 10 percent and there are too few books available for student use. CIA Review has been forced to turn away students because of a lack of textbooks. CIA Review expects to enroll approximately 200 students per course. The tuition fee is $2,000 per student. The cost of teachers is $50,000 per course, textbooks cost $150 each, and other operating expenses are estimated to be $75,000 per course. Assume all financial statements data are prepared in accordance with GAAP.
Required
a. Prepare an income statement, assuming that 200 students enroll in a course. Determine the cost of waste associated with unused books.
b. Prepare an income statement, assuming that 240 students attempt to enroll in the course. Note that 20 students are turned away because of too few textbooks. Determine the amount of lost profit resulting from the inability to serve the five additional students.
c. Suppose that textbooks can be produced through a high-speed copying process that permits delivery just in time for class to start. The cost of books made using this process, however, is $160 each. Assume that all books must be made using the same production process. In other words, CIA Review cannot order some of the books using the regular copy process and the rest using the high-speed process. Prepare an income statement under the JIT system assuming that 200 students enroll in a course. Compare the income statement under JIT with the income statement prepared in Requirement a. Comment on how the JIT system would affect profitability.
d. Assume the same facts as in Requirement c with respect to a JIT system that enables immediate delivery of books at a cost of $160 each. Prepare an income statement under the JIT system, assuming that 240 students enroll in a course. Compare the income statement under JIT with the income statement prepared in Requirement b. Comment on how the JIT system would affect profitability.
e. Discuss the possible effect of the JIT system on the level of customer satisfaction.