Question

In: Operations Management

You run a school in Florida. Fixed monthly cost is $5,130.00 for rent and utilities, $6,403.00...

You run a school in Florida. Fixed monthly cost is $5,130.00 for rent and utilities, $6,403.00 is spent in salaries and $1,689.00 in insurance. Also every student adds up to $97.00 per month in stationary, food etc. You charge $612.00 per month from every student now.

You are considering moving the school to another neighborhood where the rent and utilities will increase to $10,467.00, salaries to $6,335.00 and insurance to $2,027.00 per month. Variable cost per student will increase up to $175.00 per month. However you can charge $1,035.00 per student. At what point will you be indifferent between your current mode of operation and the new option?

Solutions

Expert Solution

Say point of indifference between current mode of operation and the new option is x

At x, profit earned through current mode of operation = revenue-(fixed+variable cost) = 612x-(5130+6403+1689+97x) = 515x-13222

At x, profit earned through new mode of operation = revenue-(fixed+variable cost) = 1035x-(10467+6335+2027+175x) = 860x-18829

So, at x,

515x-13222 = 860x-18829

or, (18829-13222)/(860-515) = x

or, x = 16.25217391 (Answer is 16 if rounding is required) = Point of indifference between your current mode of operation and the new option



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