Case Notes

Revenue and cost data of the three programs ( Exhibit 1):

Using this information, it was determined that each student contributed $4,348 to fixed costs after covering his or her variable costs. Given the fixed costs of $498,700 ($328,000 in the programs and $170,700 for the center overall), he had calculated that 115 students were needed to break even.

"The Meeting

At the meeting, several issues arose that Mr. Thomas had not anticipated, and a rather hostile atmosphere developed. Ms. Mosteller pointed out that 50 students was the maximum her program could accommodate, given current classroom space, and wondered exactly how Mr. Thomas expected her to increase the program's size. Ms. Olivo said she would be happy to expand her program by another 10 students, but in order to do so, she would need to hire another teacher, at a cost of $22,000. She wondered how Mr. Thomas might include this fact in his analysis, and, under the circumstances, whether the teacher should be considered a fixed or a variable cost. Mr. Harris told Mr. Thomas that he had been planning all along to add another 15 students to his program, and wondered why Mr. Thomas had not checked with him about this prior to preparing the figures and the chart. He too would need to hire another teacher, however, at a cost of $25,000, and also wondered whether this was a fixed or variable cost.

Ms. Fineberg seemed quite perplexed by the discussion, and began her comments by asking Mr. Thomas why he was using averages when the Center had three separate programs. She also indicated that $1,350 was far too low a surplus, since she was hoping to have some extra money available during the year for painting and some minor renovations, which would cost about $10,000. She asked Mr. Thomas how he might incorporate this need into his analysis. She also expressed some concern about Mr. Thomas's per-student fees, stating that in talking with people in other centers she had learned that Abbington's fees were about 10 percent below what others were charging. She thought an across-the-board increase to make up the difference was called for.

Finally, all three program directors queried Mr. Thomas about his variable-cost-per-student figure. They asked him how he had derived these figures and whether they included some recent price increases of about 5 percent in educational supplies. Mr. Thomas stated that they included both supplies and food, divided about 75 percent/25 percent between the two, but he confessed that he had not included any price increase in his calculations"

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Please answer:

1. Using the date in Exhibit 1 calculate (and show calculations) the break-even point for the three programs: infants and toddlers, preschool, and after-school.
2. Based on the comments and suggestions made in the meeting, and making assumptions where necessary, prepare revisions to the data shown, create a new Exhibit 2, and compute a new breakeven point for the center and each program