Question

***For some practice on this assignment, you could visit your textbook’s online site and do one of the Chapter 13 exercises (this is from an earlier edition of the textbook, so the Chapter numbers do not align)!

Understanding pricing theory is all fine and good. But you also have to be able to "crank the numbers". IMPORTANT NOTE: for the following case, assume that any change in costs, once made, continues from that point and then throughout the rest of the problem unless otherwise noted.

Calculate the breakeven point for a private, upscale K-8 (Kindergarten through 8th grade) academy with the cost structure listed below. Assume that tuition (i.e., the price) is $5,500 per student. Note: be sure to round up to the nearest whole number -- we generally don't have 2/3rds of a student!

***Important hint #1: be sure to round up to the nearest whole number -- we generally don't have 2/3rds of a student!

***Important hint #2: make sure you carefully think through which of the costs listed below will fall into Fixed Costs and which will fall into Variable Costs. You may want to re-read the Lecture to refresh your memory on this one.

administrator salaries $550,000

faculty salaries $950,000

coaches salaries $60,000

medical,...benefits $650,000

insurance $100,000

mortgage/debt $150,000

materials cost for each student $500

Breakeven point (number of enrolled students needed) for this Academy, given this cost structure is: ____________students. (Be sure to show an outline of your calculations.)

Now assume that because enrollment has tapered off, your Board of Trustees has approved a $200,000 marketing budget to develop promotional materials and to hire a part-time recruiter. (Remember to include this cost from now on.) (Again, show an outline of your calculations.)

Your new B/E point is _________ students.

In other words, to cover this increase in promotion, you’ll need another ______ students in order to breakeven.

Faculty salaries have been frozen for the past 4 years. They now indicate that they will strike if they are not given an immediate 3% pay increase. You believe that this should also be extended to the coaching staff, to head-off potential problems in that area. (Again, remember to include this cost from now on.) (Also again, show an outline of your calculations)

Rounding up to the nearest whole number, your new B/E point is _________ students.

Enrollment turns out to be 539 students. Therefore your academy has made profits of $__________.

To help defray the new marketing costs, you decide to raise your tuition from $5,500 to $6,000. Rounding up to the nearest whole number, your new B/E point is ______ students. (Show an outline of your calculations).

Please discuss the following: what would you say if the academy chose to use an odd pricing strategy, pricing tuition at $5,999? This question isn’t asking you to do any math, just to comment on the pros and cons of choosing a price point of $5,999 vs. $6,000 for the tuition.

Information for questions 8-10:

Your enrollment of 539 students (from part "5" above) drops 1 percentage point more than your tuition was raised (e.g., if tuition is raised 5%, enrollment drops 6%). Regrettably, school tuition appears to be far more elastic than expected.

Based on the information given to you in part “6” above, tuition was raised _____%.

That means that your enrollment has declined _____%.

Rounding up to the nearest whole number, enrollment is now ________ students.

Answer 1

The Tuition Fee per student = $5,000

Variable cost (Material) per student = $500

Total Fixed Cost = Adm. Salaries + Faculty salaries + Coaches salaries + Medical benefits+ Insurance + Mortgage (Lease)

= $550,000+ $950,000 +$60,000+$650,000+ $100,000 +$150,000

= $2,460,000

Contribution Margin per student = Tuition fee per student - Variable Cost per student

   =$5,500 - $500 = $5,000

Break Even Points (No. of students enrolled needed) = Total Fixed Cost Contribution Margin per student

= $2,460,000 $5,000

= 492 students

After incurring $200,000 marketing budget for developing Promotional material, the fixed cost increases.

Total Fixed Cost including Marketing development expenditure = $2,460,000 + $200,000 = $2,660,000

New Break Even Points (No. of students) = Total Fixed Cost Contribution Margin per student

   = $2,660,000 $5,000

= 532 Students

To cover the increase in promotion, we need another 40 (532 - 492) students in order to breakeven.

Additional Salaries to Faculties and Coaches = 3% of $950,000 + 3% of $60,000

   = $28,500 + $1,800 = $30,300

Now after increase in faculties and Coaches Salaries,

New Total Fixed Cost = $2,660,000 + $30,300 = $2,690,300

   New BEP (Students) =$2,690,300 $5,000

= 538 students

When the total Enrollment is 539 students, the academy has made a profit of $5,000, equal to contribution margin per student.

When Tuition fee is raised to $6,000 per student from $5,500 to cover the marketing cost.

New Contribution Margin = $6,000 - $500 = $5,500 per student

Now, New Break Even Points(students) = Total Fixed Cost New Contribution Margin

= 2,690,300 $5,500

= 489 Students

Pricing the product or services at $5,999 in stead of $6,000 is simply psychological pricing policy that affects the consumers behavior to buy the product or services and consumers think that they are paying in 5's not in 6's.

6. If enrollment is 539 and it drops by 6% or by 33 students and tuition fee raised is 5% or by $275 (5% of $5,500).   

The Tuition Fee was raised by 5%. and The enrollment has declined by 6%.

Enrolment now is 506 (539 -33) students.