Morrison Musical Education Company (MME) provides instrumental music education to children of all ages. Payment for services comes from two sources: (1) a contract with Country Day School to provide private music lessons for up to 150 band students a year (where a year is nine months of education) for a fixed fee of $150,000, and (2) payment from individuals at a rate of $100 per month for nine months of education each year. In the 2008–2009 school year, MME made a profit of $5,000 on revenues of $295,000:

Revenues:

Country Day School contract ............................. $150,000

Private students ..................................................    145,000

Total revenues ..................................................... $295,000

Expenses:

Administrative staff ............................................  $ 75,000

Teaching staff ......................................................      81,000

Facilities ...............................................................      93,500

Supplies ...............................................................      40,500

Total expenses ...................................................    290,000

Profit ....................................................................    $ 5,000

MME conducted an activity analysis and found that teaching staff wages and supplies costs are variable with respect to student-months. (A student-month is one student educated for one month.) Administrative staff and facilities costs are fixed within the range of 2,000 to 3,000 student-months. At volumes between 3,000 and 3,500 student-months, an additional facilities charge of $8,000 would be incurred. During the last year, a total of 2,700 student-months of education were provided, 1,450 of which were for private students and 1,250 of which were offered under the contract with Country Day School.

1. Compute the following using cost information from year 2008– 2009 operations:

Fixed cost per year

Variable cost per student-month

2. Suppose that in 2009–2010 Country Day School decreased its use of MME to 120 students (that is, 1,080 student-months). The fixed contract price of $150,000 was still paid. If everything else stayed as it was in 2008–2009, what profit or loss would be made in 2009–2010?
3. Suppose that at the beginning of 2009–2010 Country Day School decided not to renew its contract with MME, and the management of MME decided to try to maintain business as usual with only private students. How many students (each signing up for nine months) would MME require to continue to make a profit of $5,000 per year?