Heath Club and Keith Club are competing health and recreation clubs in Atlanta. They both offer tennis training clinics to adults. Heath pays its coaches $6,000 per season. Keith pays its coaches $150 per student enrolled in the clinic per season. Both clubs charge a tuition fee of $250 per season.
a. Prepare income statements for Heath and Keith, assuming that 40 students per season attend each clinic.
b. The ambitious new director of Heath Club tries to increase his market share by reducing the club’s tuition per student to $140 per clinic. Prepare an income statement for Heath, assuming that the club attracts all of Keith’s customers and therefore is able to enroll 80 students in its clinics.
c. Independent of Requirement b, Keith Club tries to lure Heath’s students by lowering its price to $140 per student. Prepare an income statement for Keith, assuming that the club succeeds in enrolling 80 students in its clinics.
d. Explain why the strategy described in Requirement b produced a profit while the same strategy described in Requirement c produced a loss.
e. Prepare an income statement for Heath Club and Keith Club, assuming that 20 students attend a clinic at the original $250 tuition price.
f. It is always better to have fixed rather than variable cost. Explain why this statement is false.
g. It is always better to have variable rather than fixed cost. Explain why this statement is false.