# MBA560 Financial and Managerial Accounting: P11-25 Cooper Training Services (CTS) provides

MBA560 Financial and Managerial Accounting
Module 6 Homework

Problem 11-25 Effects of operating leverage on profitability
Cooper Training Services (CTS) provides instruction on the use of computer software for the employees of its corporate clients. It offers courses in the clients’ offices on the clients’ equipment. The only major expense CTS incurs is instructor salaries; it pays instructors \$3,600 per course taught. CTS recently agreed to offer a course of instruction to the employees of Akers Incorporated at a price of \$340 per student. Akers estimated that 20 students would attend the course.

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 20 percent increase in enrollment (i.e., enrollment increases to 24 students). What is the percentage change in profitability?
d. Determine the profit, assuming a 20 percent decrease in enrollment (i.e., enrollment decreases to 16 students). What is the percentage change in profitability?
e. Explain why a 20 percent shift in enrollment produces more than a 20 percent shift in profitability. Use the term that identifies this phenomenon.

Part 2:
The instructor has offered to teach the course for a percentage of tuition fees. Specifically, she wants \$210 per person attending the class. Assume that the tuition fee remains at \$340 per student.

Required
f. Is the cost of instruction a fixed or a variable cost?
g. Determine the profit, assuming that 20 students take the course.
h. Determine the profit, assuming a 20 percent increase in enrollment (i.e., enrollment increases to 24 students). What is the percentage change in profitability?
i. Determine the profit, assuming a 20 percent decrease in enrollment (i.e., enrollment decreases to 16 students). What is the percentage change in profitability?
j. Explain why a 20 percent shift in enrollment produces a proportional 20 percent shift in profitability.

Part 3:
CTS sells a workbook with printed material unique to each course to each student who attends the course. Any workbooks that are not sold must be destroyed. Prior to the first class, CTS printed 20 copies of the books based on the client’s estimate of the number of people who would attend the course. Each workbook costs \$20 and is sold to course participants for \$31. This cost includes a royalty fee paid to the author and the cost of duplication.

Required
k. Calculate the workbook cost in total and per student, assuming that 16, 20, or 24 students attempt to attend the course.
l. Classify the cost of workbooks as fixed or variable relative to the number of students attending the course.
m. Discuss the risk of holding inventory as it applies to the workbooks.
n. Explain how a just-in-time inventory system can reduce the cost and risk of holding inventory.