Question

CIA Review, Inc., provides review courses twice each year for students studying to take the CIA exam. The cost of textbooks is included in the registration fee. Text material requires constant updating and is useful for only one course. To minimize printing costs and ensure availability of books on the first day of class, CIA Review has books printed and delivered to its offices two weeks in advance of the first class. To ensure that enough books are available, CIA Review normally orders 10 percent more than expected enrollment. Usually there is an oversupply and books are thrown away. However, demand occasionally exceeds expectations by more than 10 percent and there are too few books available for student use. CIA Review has been forced to turn away students because of a lack of textbooks. CIA Review expects to enroll approximately 200 students per course. The tuition fee is $900 per student. The cost of teachers is $18,000 per course, textbooks cost $55 each, and other operating expenses are estimated to be $32,000 per course. Assume all financial statements data are prepared in accordance with GAAP.

Required

1. a. Prepare an income statement, assuming that 200 students enroll in a course. Determine the cost of waste associated with unused books.

2. b-1. Prepare an income statement, assuming that 242 students attempt to enroll in the course, but 22 students are turned away because of too few textbooks.

3. b-2. Prepare an income statement, assuming that 242 students attempt to enroll in the course, with all being accepted.

4. b-3. Determine the amount of lost profit resulting from the inability to serve the 22 additional students.

5. c. Suppose that textbooks can be produced through a high-speed copying process that permits delivery just in time for class to start. The cost of books made using this process, however, is $60 each. Assume that all books must be made using the same production process. In other words, CIA Review cannot order some of the books using the regular copy process and the rest using the high-speed process. Prepare an income statement under the JIT system assuming that 200 students enroll in a course.

6. d-1. Assume the same facts as in requirement c with respect to a JIT system that enables immediate delivery of books at a cost of $60 each. Prepare an income statement under the JIT system, assuming that 242 students enroll in a course.

7. d-2. Which system results in higher income?

Answer 1

A)

Income statement			Amount ($)
Revenue (a)		= 900*200	180,000
Expenses
Cost of teachers			18,000
Cost of books		= 220*55	12,100
Other operating expenses			32,000
Total expense (b)			62,100
Profit (a) - (b)			117,900
Cost of waste associated with unused books		= 20*55	1,210

Cost of waste associated with books = 220 - 200 =20*55

B1.

Income statement		Amount ($)
Revenue (a)	= 900*220	198,000
Expenses
Cost of teachers		18,000
Cost of books	= 220*55	12,100
Other operating expenses		32,000
Total expense (b)		62,100
Profit (a) - (b)		135,900

As 22 students are turned away, income statement is prepared for 220 students

B2.

Income statement		Amount ($)
Revenue	= 900*242	217,800
Expenses
Cost of teachers		18,000
Cost of books	= 242*55	13,310
Other operating expenses		32,000
Total expense (b)		63,310
Profit (a) - (b)		154,490

As 242 students are accepted, cost of books will also be for 242 students

B3. Lost profit resulting from the inability to serve the 22 additional students = $154,490 - $135,900

= $18,590

C.

Income statement		Amount ($)
Revenue	= 900*200	180,000
Expenses
Cost of teachers		18,000
Cost of books	= 200*60	12,000
Other operating expenses		32,000
Total expense (b)		62,000
Profit (a) - (b)		118,000

Cost of books is taken at 60 per student

D1.

Income statement		Amount ($)
Revenue	= 900*242	217,800
Expenses
Cost of teachers		18,000
Cost of books	= 242*60	14,520
Other operating expenses		32,000
Total expense (b)		64,520
Profit (a) - (b)		153,280

D2. JIT system results in higher income as under JIT system 242 students can be accepted which gives an income of 153,280,whereas 242 students came under earlier system they had to be turned away which gives 135,900 for 220 students.

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