Problem 11-25 Effects of operating leverage on profitability Franklin Training Services (FTS) provides instruction on the use of computer software for the em- ployees of its corporate clients. It offers courses in the clients' offices on the clients equipment. The only major expense FTS incurs is instructor salaries; it pays instructors $6,000 per course taught. FTS recently agreed to offer a course of instruction to the employees of Novak Incorporated at a price of $700 per student. Novak estimated that 20 students would attend the course. Base your answers on the preceding information, Part 1: Required a. Relative to the number of students in a single course, is the cost of instruction a fixed or a variable cost? b. Determine the profit, assuming that 20 students attend the course. c. Determine the profit, assuming a 10 percent increase in enrollment (ie., enrollment increases to 22 students). What is the percentage change in profitability? d. Determine the profit, assuming a 10 percent decrease in enrollment (ie., enrollment decreases to 18 students). What is the percentage change in profitability? e. Explain why a 10 percent shift in enrollment produces more than a 10 percent shift in profitability. Use the term that identifies this phenomenon. Problem 11-25 (cont.) Part 2: The instructor has offered to teach the course for a percentage of tuition fees. Specifically, she wants $300 per person attending the class. Assume that the tuition fee remains at $700 per student. Required f. Is the cost of instruction a fixed or a variable cost? 8. Determine the profit, assuming that 20 students take the course. h. Determine the profit, assuming a 10 percent increase in enrollment (ie., enrollment increases to 22 students). What is the percentage change in profitability? 1. Determine the profit, assuming a 10 percent decrease in enrollment (ie., enrollment decreases to 18 students). What is the percentage change in profitability? J. Explain why a 10 percent change in enrollment produces a proportional 10 percent change in profitability. Part 1 a. The cost of instruction is a _cost. 18 20 22 b. c. and d. Number of Students Revenue Cost of instruction Profit % Change %) % Change %) %) %) Percentage change in revenue: Percentage change in profit: Problem 11-25 Solution(cont.) e. caused the percentage increase in profit- ability to be greater than the percentage increase in revenue. Explain: Part 2 f. The cost of instruction is a: cost. 18 20 22 g. h. and i. Number of Students Revenue Cost of instruction Profit % Change %) % Change %= %) %= Percentage Change in Revenue: Percentage Change in Profit: j. The change in profit is proportional to the change in revenue be- cause
