Question

Franklin Training Services (FTS) provides instruction on the use of computer software for the employees of its corporate clients. It offers courses in the clients’ offices on the clients’ equipment. The only major expense FTS incurs is instructor salaries; it pays instructors $6,000 per course taught. FTS recently agreed to offer a course of instruction to the employees of Novak Incorporated at a price of $700 per student. Novak estimated that 20 students would attend the course.

Part 3:

FTS sells a workbook with printed material unique to each course to each student who attends the course. Any workbooks that are not sold mst be destroyed. Prior to the first class, FTS printed 20 copies of the books based on the client's estimate of the number of people who would attend the course. Each workbook costs $30 and is sold to course participants for $50. This cost includes a royalty fee paid to the author and the cost of duplication.

Required

k. Calculate the workbook cost in total and per student, assuming that 18, 20, or 22 students attempt to attend the course. Round your computation to two decimal points.

l. Classify the cost of workbooks as fixed or variable relative to the number of students attending the course.

m. Discuss the risk of holding inventory as it applies to the workbooks.

n. Explain how a just-in-time inventory system can reduce the cost and risk of holding inventory.

Answer 1

(k) Calculating workbook cost

Particulars	Student 18	Student 20	Student 22	Explanation
Number of students (a)	18	20	22	Given in question
Number of minimum workbooks (b)	20	20	22	Workbooks are on per student basis but minimum is 20 workbooks, above that level per student per workbook increases.
Costs Per workbook (c)	$30.00	$30.00	$30.00	Given in question
Total costs of workbooks (d) = (b) X (c)	20 X $30 = $600	20 X $30 = $600	22 X $30 = $660	Calculated as logical.
Costs per student (e) = (d) / (a)	$600/18 = $33.33	$600/20 = $30	$660/22 = $30	Cost per student for 18 students is higher because they had to incur $60 i.e. cost of 2 workbooks extra i.e. $60/18 = $3.33

(l) There are two components in the costs of workbook

They are (i)Fixed Cost (ii)Variable Cost

In the given instance FTS need to incur minimum cost of workbook for 20 students, even in case students are less than 20, the company needs to incur this minimum costs i.e. 20 X $30 per workbook

= $600 = Fixed Cost

Further after such activity level, the cost per workbook is $30 per student as for 20 students it will be $630, and will increase by $30 per student thus variable will be $30 per workbook.

(m) As with concern to FTS business, its workbook is precious as any workbook left is destroyed, so that no copies can be created. Also there will be additional expenses like storage, security of those workbooks. Thus it is suggested that since the risk of copying the workbooks is higher, no workbook shall be held as inventory for future purpose.

(n) Under just in time method it helps in inventory management by

• Reducing wastage

• Improving efficiency

• Contributing to smoother production flow

  In the given instance it will help by saving the fixed cost of $60 i.e. $30 for 2 workbooks in case the students are only 18 and saving the cost of destroying the workbook.