1. 5-24 ALLOCATION OF COSTS TO ACTIVITIES, UNUSED CAPACITY. 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 Heightss costs are indirect. Heights currently has five indirect cost categories, which are listed in the following table. Smith wants to develop an ABC system for the school. He identifies four activitiesacademic instruction, administration, sports training, and community relationshipsrelated 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 relationshipsdealing with the town council and participating in local activitiesis 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.

	Percentage of Costs Used by Each Activity
Indirect Cost	Academic Instruction	Administration	Sports Training	Community Relationships	2018 Expenditures
Teachers salaries/benefits	60%	20%	8%	12%	$4,000,000
Principals salaries and benefits	10	60	5	25	400,000
Facilities	35	15	45	5	2,600,000
Office staff salaries and benefits	5	60	10	25	300,000
Sports program staff salaries and benefits	35	10	45	10	500,000

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 2019 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 2019 are the same as in 2018, what is the overall cost of educating each student in 2019?
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 Heightss 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?