Question
Gallagher Stubbs Incorporated (GSI) presents professional development seminars for Chartered Professional Accountants throughout North America. Eastman Universal (EU) has approached GSI to present 40 one-week
Gallagher Stubbs Incorporated (GSI) presents professional development seminars for Chartered Professional Accountants throughout North America. Eastman Universal (EU) has approached GSI to present 40 one-week seminars during 2021. This activity level represents the maximum number of seminars that GSI is capable of presenting annually. GSI staff would present the week-long seminars in various cities throughout the United States and Canada.
Thaddeus Gallagher, GSI's president, is evaluating three financial options for the revenues from Eastman: accept a flat fee for each seminar, receive a percentage of Eastman's profit before tax from the seminars, and form a joint venture to share costs and profits.
Estimated costs for the 2021 seminar schedule follow:
Gallagher Stubbs Incorporated Eastman Universal Fixed costs for the year:
Salaries and benefits $ 204,000
N/A * Facilities
64,000
N/A * Travel and hotel
0
$ 281,820
Other
50,000
N/A * Total fixed costs $ 318,000
$ 281,820
Variable cost per participant:
Supplies and materials
0
$ 47
Marketing
0
18
Other site costs
0
35
*Eastman's fixed costs are excluded because the amounts are not considered relevant for this decision (i.e., they will be incurred whether or not the seminars are presented). Eastman does not include these costs when calculating the profit before tax for the seminars.
EU plans to charge $1,200 per participant for each 1-week seminar. It will pay all variable marketing, site costs, and materials costs.
1. Assume that the seminars are handled as a joint venture by GSI and EU to pool costs and revenues.
a. Determine the total number of seminar participants needed to break even on the total costs for this joint venture.
b. Assume that the joint venture has an effective income tax rate of 30%. How many seminar participants must the joint venture enroll to earn an after-tax income of $204,554?
2. Assume that GSI and EU do not form a joint venture, but that GSI is an independent contractor for EU. EU offers two payment options to GSI: a flat fee of $9,500 for each seminar or a fee of 40% of EU's profit before taxes from the seminars. Compute the minimum number of participants needed for GSI to prefer the 40% fee option over the flat fee.
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