Using fixed and variable costs in analysis The Soft Shoe Dance Studio is a well-estab- lished company with many loyal customers. Two years ago the company moved into a large new facility with significant excess space. The studio's owners are considering expanding the number of dance classes, but before doing so, they hire an accountant to analyze their accounting data. The accountant's analysis of cost behavior patterns shows the costs that varied with the number of student-hours taught and the costs that remained constant. During the year, 15,000 student- hours were taught and revenue totaled $96,000.

The company is considering two alternatives which should help it to increase income:

1. Adopt an advertising campaign costing $16,000 which should increase student hours by one third.

2. Lower prices by $2 per student hour which should double the number of student-hours taught.

REQUIRED

a. Compute the revenue per student hour taught last year.

b. Compute net income for last year.

c. Compute net income per student-hour taught.

d. Calculate the effect of adopting the advertising campaign.

e. Calculate the effect of lowering the price of lessons.
Computer requirement:

f. To test the sensitivity of cost changes on net income, vary administrative salaries, advertising, and instructor salaries by 15 percent above and 15 percent below their current levels.

Costs that did not change with volume of hours taught: Depreciation of studio.... Depreciation of furniture and fixtures Utilities..... Advertising... Administrative salaries Property taxes Costs that varied with number of hours taught: Instructor salaries. Supplies Utilities. $ 8,000 2,500 2,400 5,000 26,000 4,100 $21,000 4,500 5,000