Heights Academy, a private school, serves 500 students: 200 in the middle school (Grades 6 to 8) and 300 in the high school (Grades 9 to 12). Each school group has its own assistant principal, and there is one principal, Brian Smith, for the academy. For any single student, almost all of Heights' costs are indirect. Heights currently have five indirect cost categories, which are listed in the following table. Smith wants to develop an activity-based costing (ABC) system for the school. He identifies four activities-academic instruction, administration, sports training, and community relationships-related to the educational enterprise.

Smith and his team identify the number of students as the cost driver of academic instruction and administration costs, and the number of team sports offered by the school as the driver of sports training costs. The cost of maintaining community relationships-dealing with the town council and participating in local activities-is a facility-sustaining cost that the school has to incur each year. The table shows the percentage of costs in each line item used by each activity.

Required
1. What is the overall cost of educating each student? Of this cost, what percentage is the cost of academic instruction? Of administration?
2. Smith is dismayed at the high cost of sports training. Further examination reveals that $300,000 of those costs are for ice hockey, a sport pursued by a total of 40 students. What would be the overall cost of educating each student if the ice hockey program is eliminated and its cost saved?
3. For the 2016 school year, Heights charges an annual fee of $1,000 for any student who wants to play ice hockey. As a result, 10 of the less-motivated students drop the sport. Assuming the costs of the school in 2016 are the same as in 2015, what is the overall cost of educating each student in 2016?
4. Consider the costs of the academic instruction activity and assume they are fixed in the short run. At these costs, Heights could serve 600 students. What is the cost of the academic instruction resources used by Heights' current 500 students? What is the cost of unused academic instruction capacity? What actions can Smith take to reduce the cost of academic instruction per student in the short run? In the long run?

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Percentage of Costs Used by Each Activity Academic Instruction Administration Training Relationships Expenditures Sports Community 2015 Indirect Cost Teachers' salaries/benefits Principals' salaries and benefits Facilities Office staff salaries and benefits Sports program staff salaries 60% 10 35 20% 60 12% 25 S4,000,000 400,000 2,600,000 300,000 45 60 10 25 and benefits 35 10 45 10 500,000