Jim’s Pro Golf Clinics specializes in short golf lessons and training tips. The only service available at Jim’s is minor variations on a “20-minute” lesson for which the customer is charged $20. The clinic has five (5) newly trained "golf pros." (Jim does not work in the clinic. And, as owner/entrepreneur, he takes no salary.) Each pro is paid an annual salary of $36,000. All equipment is leased on an annual basis including store fixtures at $6,000 per year, and swing monitoring equipment at $4,000 per year. Building space is leased at the rate of $1,000 per month.

Jim is concerned about the shop’s cost structure and seeks your advice.

Required:

1. Compute the contribution margin per lesson. Compute the annual break-even point in number of lessons.

2. Suppose the landlord decides to revise the monthly rent to $200 plus 10% of the revenue per lesson. What is the new contribution margin per lesson? What is the new annual break-even point in number of lessons?

3. Ignore requirement 2 and assume that the pros cease to be paid a salary but instead receive a 50% commission on the sale of each lesson. What is the new contribution margin per lesson? What is the new annual break-even point in number of lessons?

4. Now assume that both the rent structure in requirement 2 and the commission system in requirement 3 are adopted. What is the new contribution margin per lesson? What is the new annual break-even point in number of lessons?

5. Evaluate each of the four cost structures proposed above. Which one would you recommend and why? [Hint: On one graph, plot profits (on the vertical “y” axis) versus lessons (on horizontal “x” axis) for each of the alternatives above. Plotting this by hand will probably be faster than attempting to use a spreadsheet.]

Answer rating: 100% (QA)

Complete solution of all the parts is given below ANSWER Ans 1 CONTRIBUTION MARGIN ANNUAL BEP Contri... View the full answer