Question

Garner Strategy Institute (GSI) presents executive-level training seminars nationally. Eastern University (EU) has approached GSI to present 40 one-week seminars during 2019. This activity level represents the maximum number of seminars that GSI is capable of presenting annually. GSI staff would present the week-long seminars in various cities throughout the United States and Canada. Terry Garner, GSI’s president, is evaluating three financial options for the revenues from Eastern: accept a flat fee for each seminar, receive a percentage of Eastern’s profit before tax from the seminars, and form a joint venture to share costs and profits. Estimated costs for the 2019 seminar schedule follow: Garner Strategy Institute Eastern University Fixed costs for the year: Salaries and benefits $ 200,000 N/A * Facilities 46,000 N/A * Travel and hotel 0 $ 360,920 Other 72,000 N/A * Total fixed costs $ 318,000 $ 360,920 Variable cost per participant: Supplies and materials 0 $ 47 Marketing 0 18 Other site costs 0 35 *Eastern’s fixed costs are excluded because the amounts are not considered relevant for this decision (i.e., they will be incurred whether or not the seminars are presented). Eastern does not include these costs when calculating the profit before tax for the seminars. EU plans to charge $1,200 per participant for each 1-week seminar. It will pay all variable marketing, site costs, and materials costs. Required 1. Assume that the seminars are handled as a joint venture by GSI and EU to pool costs and revenues. a. Determine the total number of seminar participants needed to break even on the total costs for this joint venture. b. Assume that the joint venture has an effective income tax rate of 30%. How many seminar participants must the joint venture enroll to earn an after-tax income of $97,209? 2. Assume that GSI and EU do not form a joint venture, but that GSI is an independent contractor for EU. EU offers two payment options to GSI: a flat fee of $9,500 for each seminar or a fee of 40% of EU’s profit before taxes from the seminars. Compute the minimum number of participants needed for GSI to prefer the 40% fee option over the flat fee.

double figures for fixed assets because there are 2, one for gsi and one for eu

Answer 1

CALCULATION OF COST

FIXED COST	GSI	EASTERN
salary and benefits	200000
facilities	46000
travel and hotel	0	360920
others	72000
TOTAL	318000	360920
VARIABLE CAST	GSI	EASTERN	TOTAL
supplies	0	47	47
marketing	0	18	18
other site cost	0	35	35
TOTAL	0	100	100

1) a}Breakeven is the revenue where there is no loss noprofit and is calculated by formula cost / contribution per participant

CALCULATION FOR CONTRIBUTION

Expected charges per participant 1200

less variable cost 100

contribution 1100

Total fixed cost

GSI 318000

Eastern 360920

Total fixed cost of jv 678920

Hence BEP is 678920/1100 618

However it is also given that decision is uneffected fixed cost of eastern hence in such situation BEP will be

318000/91.67% 290   

B}Number of participants to earn after tax profit of $97209

Lets assume profit before tax 100

less tax 30% 30

After tax profit will be 70

Expected after tax profit 97209

Hence before tax will be 97209/70*100 138870

Exprected revenue is calculated by formula =Expected contribution /pv ratio

pv ratio is calculated by formula=contribution/sakes*100 91.67%

Expected contribution =fixed cost +expected profit

678920+138870 = 817790

Expected revenue =817790/91.67% 892103

Expected charges perparticipant 1200

NUMBER OF PARTICIPANT TO EARN AFTER TAX PROFIT OF 97209=892103/1200 =744

2)CALCULATION OF PROFIT FOR GSI

Option 1= Flat fee $9500 per seminar

Option 2 =40% of profit of EU

Profit for GSI in case they recieve flat fee $9500 per seminer

PARTUCULARS $

Expected revenue 380000

less:Fixed cost-GSI 318000

Revenue 62000

If gsi wants to prefer 40% of EU profits

EU should be atleast $62000 as 40%X of profits that it earns

Hence expected revenue for EU should be

payment to GSI 62000

Since EU doesnot cobsider its fixedcost for decision minimum revenue expected

by EU will be 62000/91.67% 67634

Charges per participant 1200

number of participants 57

FOR ANY NUMBER ABOVE 57 GSI WILL BE BENFECIAL