Harmon Academy, a private school, serves 500 students: 200 in the middle school (grades 6 to 8) and 300 in the high school (grades 9 to 12). Each school group has its own assistant principal, and there is one principal, Brian Smith, for the academy. For any single student, almost all of Harmon's costs are indirect. Harmon currently has five indirect cost categories, which are listed in the following table. Smith wants to develop an activity-based costing system for the school. He identifies four activities-academic instruction, administration, sports training, and community relationships-related to the educational enterprise. Smith and his team identify number of students as the cost driver of academic instruction and administration costs, and the number of team sports offered by the school as the driver of sports training costs. The cost of maintaining community relationships-dealing with the town council and participating in local activities-is a facility-sustaining cost that the school has to incur each year. The table shows the percentage of costs in each line item used by each activity.

REQUIRED
1. What is the overall cost of educating each student? Of this cost, what percentage is the cost of academic instruction? Of administration?
2. Smith is dismayed at the high cost of sports training. Further examination reveals that $300,000 of those costs are for ice hockey, a sport pursued by a total of 40 students. What would be the overall cost of educating each student if the ice hockey program is eliminated and its cost saved?
3. For the 2013 school year, Harmon charges an annual fee of $1,000 for any student who wants to play ice hockey. As a result, 10 of the less-motivated students drop the sport.
Assuming the costs of the school in 2013 are the same as in 2012, what is the overall cost of educating each student in 2013?
4. Consider the costs of the academic instruction activity and assume they are fixed in the short run. At these costs, Harmon could serve 600 students. What is the cost of the academic instruction resources used by Harmon's current 500 students? What is the cost of unused academic instruction capacity? What actions can Smith take to reduce the cost of academic instruction per student in the short run? In the long run?

Transcribed Image Text:

Percentage of Costs Used by Each Activity Academic Sports Community 2012 Indirect Cost Teachers' salaries/benefits Principals' salaries Instruction 60% 10% Administration Training Relationships Expenditures 20% 3% 12% $4,000,000 and benefits 60% 15% 5% 25% 5% 400,000 Facilities Office staff salaries 35% 45% 10% 45% 2,600,000 300,000 500,000 and benefits 5% 25% Sports program staff salaries and benefits 35% 10% 10%