Brad Timberlake is known throughout the world for his insights on effective and efficient time management. Currently, Brad offers 35 daylong seminars each year at locations throughout North America, Europe, and Asia. The average seminar has 125 participants, each of whom pays a $400 fee. The variable costs (folder, worksheets, copy of Brad’s book, and food) amount to $75 per participant. In addition, setting up the seminar itself (the use of a hotel or convention center, hotel staff, and Brad’s travel expenses) costs $20,000 per seminar. Finally, Brad pays a coordinator a salary of $50,000 per year to organize his seminars and incurs $250,000 in fixed costs annually to maintain a central office and support staff.

Required:

a. Preparing a GAAP income statement for Brad’s operations, calculate Brad’s gross margin and profit before taxes for the year. Remember to classify all administration costs as below the gross margin and all costs connected with offering the seminar above the gross margin.

b. Classify Brad’s costs as being unit-, batch-, product-, or facility-level costs, as defined in Chapter 2.

c. How does the cost classification in part (b) correspond to the classification of costs into product and period costs in part (a)? Would this correspondence between costs per the cost hierarchy into product and period costs always hold? Provide counterexamples.