Jims Pro Golf Clinics specializes in short golf lessons and training tips. The only service available at Jims is minor variations on a 20-minute lesson for which the customer is charged $20. The clinic has five (5) newly trained "golf pros." (Jim does not work in the clinic. And, as owner/entrepreneur, he takes no salary.) Each pro is paid an annual salary of $36,000. All equipment is leased on an annual basis including store fixtures at $6,000 per year, and swing monitoring equipment at $4,000 per year. Building space is leased at the rate of $1,000 per month.

Jim is concerned about the shops cost structure and seeks your advice.

Required:

1. Compute the contribution margin per lesson. Compute the annual break-even point in number of lessons.

2. Suppose the landlord decides to revise the monthly rent to $200 plus 10% of the revenue per lesson. What is the new contribution margin per lesson? What is the new annual break-even point in number of lessons?

3. Ignore requirement 2 and assume that the pros cease to be paid a salary but instead receive a 50% commission on the sale of each lesson. What is the new contribution margin per lesson? What is the new annual break-even point in number of lessons?

4. Now assume that both the rent structure in requirement 2 and the commission system in requirement 3 are adopted. What is the new contribution margin per lesson? What is the new annual break-even point in number of lessons?

5. Evaluate each of the four cost structures proposed above. Which one would you recommend and why? [Hint: On one graph, plot profits (on the vertical y axis) versus lessons (on horizontal x axis) for each of the alternatives above. Plotting this by hand will probably be faster than attempting to use a spreadsheet.]