The Parent Teacher Association (PTA) of Meadow High School is planning a fund- aising campaign. The PTA is considering the possibility of hiring Eric Logan, a world-renowned investment counselor, to address the public. Tickets would sell for $28 each. The school has agreed to let the PTA use Harville Auditorium at no cost. Mr. Logan is willing to accept one of two compensation arrangements. He will sign an agreement to receive a fixed fee of $10,000 regardless of the number of tickets sold. Alternatively, he will accept payment of $20 per ticket sold. In communities similar to that in which Meadow is located, Mr. Logan has drawn an audience of approximately 500 people.

Required

a. In front of the class, present a statement showing the expected net income assuming 500 people buy tickets.

b. Divide the class into groups and then organize the groups into four sections. Assign one of the following tasks to each section of groups.

Group Tasks

(1) Assume the PTA pays Mr. Logan a fixed fee of $10,000. Determine the amount of net income that the PTA will earn if ticket sales are 10 percent higher than expected. Calculate the percentage change in net income.

(2) Assume that the PTA pays Mr. Logan a fixed fee of $10,000. Determine the amount of net income that the PTA will earn if ticket sales are 10 percent lower than expected. Calculate the percentage change in net income.

(3) Assume that the PTA pays Mr. Logan $20 per ticket sold. Determine the amount of net income that the PTA will earn if ticket sales are 10 percent higher than expected. Calculate the percentage change in net income.

(4) Assume that the PTA pays Mr. Logan $20 per ticket sold. Determine the amount of net income that the PTA will earn if ticket sales are 10 percent lower than expected. Calculate the percentage change in net income.

c. Have each group select a spokesperson. Have one of the spokespersons in each section of groups go to the board and present the results of the analysis conducted in Requirement b. Resolve any discrepancies in the computations presented at the board and those developed by the other groups.

d. Draw conclusions regarding the risks and rewards associated with operating leverage. At a minimum, answer the following questions.

(1) Which type of cost structure (fixed or variable) produces the higher growth potential in profitability for a company?

(2) Which type of cost structure (fixed or variable) produces the higher risk of declining profitability for a company?

(3) Under what circumstances should a company seek to establish a fixed cost structure?

(4) Under what circumstances should a company seek to establish a variable cost structure?