Question

LearningExchange Ltd offers specialised exchange programs for Australian students to live overseas and study in a local school from two to twelve months. The company’s exchange programs also include local tours. The sales and direct cost data on the two popular programs for last year are as follows:
Thailand New Zealand Number of exchange programs sold 10 15 Number of students per program 6 6 Revenue per student $14,000 $17,000 Direct cost per program: Program leaders' salary (percentage of revenue per program) 5% 7% Program assistant salary $5,000 $6,000 Local school fees (percentage of revenue per program) 25% 30% Local tour guides $2,000 $4,200 Air travel cost $4,500 $1,900 Accommodation and meals $20,000 $38,000 Insurance $2,100 $2,200

The overhead costs for the last year as follows:
Managers' salaries $100,000 Sales personnel salaries $120,000 Rent and property taxes $22,000 Utilities $8,000 Depreciation on equipment $6,000 Other operating costs $9,000

To calculate the profitability of each exchange program, overheads are allocated to each program in proportion to the actual sales revenue.

Required: 1. Calculate the contribution of each tour package towards the overall profit of the company. [10 marks]
Click or tap here to enter text.

2. Should the company keep on offering both tour packages? Explain and support your answer with necessary calculations. [1 mark]
Click or tap here to enter text.

3. Do you consider the company’s overhead allocation method to be appropriate or would you suggest an alternative? Explain. [1 mark]
Click or tap here to enter text.

4. What should the company do to improve the profitability of each exchange program? Provide some suitable examples

Answer 1

Overall Profitability of the two programs -

1. Contribution of each tour package towards the overall profit of the comapny -

2.

If the company is more directed towards profitability then company should only concentrate on New Zealand program as the profitability as compare to Thiland is way more high.

Thiland product did good in contribution made towards revenue. If the company plans to increase exchange programs for Thiland then the fixed cost will not hamper the profitability of the Thiland.

3. Overhead Allocation Method -

This method takes into consideration all the indirect cost which are not direct part of the product. Which is important sometimes but it will make difficulties to take out cost per unit of the product or variable cost of the product. Variable cost are the product cost which are per unit cost and they changes according to the changes in output. They have direct bearing on the output of the production.

Fixed Cost on the other hand have no relation with the units of the company as they are fixed no matter how many products would the company generate.

If the company want to control cost that are controlable then company may go for Variable and fixed overheads costing. This will help them to find out which cost are variable and which are fixed in the production.

That help them to control cost.

4. Improvement in Profitability -

As far as profitability of the program is concern in the margin table it shows that Thiland has better contribution margin as compare to New Zealand program. Hence its advisable to increase exchange program in Thiland because it has the capacity to generate more revenue then New Zealand program.