Question

A dance studio currently charges customers $25 for a half-hour dance lesson. The studio employs a large number of dance instructors who are paid only for the lessons they give and receive $10 per lesson. The studio currently spends 18,000 per month for rent and could increase its dance space by renting an adjoining unit in its building for an additional 8,000 per month. The studio's current space is sufficient to give ten lessons per hour.

Currently the studio is open for forty hours during the evenings and weekends and gives an average of 390 lessons per week during those times. However, during its thirty weekday hours, the studio gives only an average of 100 lessons per week.

a. Calculate the breakeven sales level for a 20 percent decrease in the price of a dance lesson.

b. Calculate the breakeven sales level for a 20 percent dance lesson price decrease for only those lessons during the studios weekday hours

c. Use the breakeven calculations in Part A and Part B to explain why it would be preferable to restrict the price decrease to the studio's weekday hours. If the price decrease were restricted to the studio's weekday hours, what type of price-segmentation fence would be involved?

Answer 1

For this solution, we can considered 1 year is 52 weeks
Total fixed cost per month (18000+8000)	26000
Total fixed cost per year (26000*12)	312000
Total fixed cost per week (312000/52)	6000

20 percent decrease in the price of a dance lesson for all hours.
	Evenings and weekends	Weekday hours	Total
Number of hours per week	40	30	70
Discount given	Yes	Yes
Average number of lessons per week	390	100
Charge per lessons	20	20
Total revenue per week (Average number of lessons per week * charge per lessons)	7800	2000	9800
Less: variable cost (Average number of lessons per week * 10)	3900	1000	4900
Total contribution per week	3900	1000	4900
Less: fixed cost per week			6000
Operating income per week			-1100
Break even sales level in dollars value
Total contribution per week			4900
Total revenue per week			9800
Contribution margin ratio (total contribution per week / Total revenue per week)			50%
Fixed cost per week			6000
Contribution margin ratio (total contribution per week / Total revenue per week)			50%
Break even sales level in dollars value per week (fixed cost per week / Contribution margin ratio )			$          12,000
Annual Break even sales level in dollars value (Break even sales level in dollars value per week * 52 )			$        624,000

20 percent decrease in the price of a dance lesson for only those lessons during the studios weekday hours
	Evenings and weekends	Weekday hours	Total
Number of hours per week	40	30	70
Discount given	No	Yes
Average number of lessons per week	390	100
Charge per lessons	25	20
Total revenue per week (Average number of lessons per week * charge per lessons)	9750	2000	11750
Less: variable cost (Average number of lessons per week * 10)	3900	1000	4900
Total contribution per week	5850	1000	6850
Less: fixed cost per week			6000
Operating income per week			850
Break even sales level in dollars value
Total contribution per week			6850
Total revenue per week			11750
Contribution margin ratio (total contribution per week / Total revenue per week)			58.29787%
Fixed cost per week			6000
Contribution margin ratio (total contribution per week / Total revenue per week)			58.29787%
Break even sales level in dollars value per week (fixed cost per week / Contribution margin ratio )			$          10,292
Annual Break even sales level in dollars value (Break even sales level in dollars value per week * 52 )			$        535,182

Why it would be preferable to restrict the price decrease to the studio's weekday hours. Because Break-even level under 20 percent decrease in the price of a dance lesson for all hours is high compared to 20 percent decrease in the price of a dance lesson for only those lessons during the studios weekday hours

So it should advise to prefer to restrict the price decrease to the studio's weekday hours.