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. 1 Total Number of seminar participants needed to break even (per year). 2. 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? what is required number of participants? (per year) 3. 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. what is minimum number of seminar participants?

Answer 1

CALCULATION OF COST
Fixed Cost
	GSI	EASTERN
Salary and Benefits	200000
Facilities	46000
Travel and Hotel	0	360920
Other	72000
TOTAL	318000	360920
Variable Cost
	GSI	EASTERN	TOTAL
Supplies	0	47	47
Marketing	0	18	18
Other Site Cost	0	35	35
TOTAL	0	100	100
1) Breakeven is the revenue where there is no loss no profit situation
and is calculated by formula Fixed Cost/Contribution per Participant
Calculation fo 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 Break Even Point is	678920/1100		618
However it is also given that
decision is unaffected fixed cost
of Eastern hence in such situation
BEP will be	318000/91.67%		290
2) Number of participant to earn after tax profit of $97209
Lets Assume Profit before tax	100
Less Taxes 30%	30
After Tax Profit will be	70
Expected After Tax Profit	97209
Hence before tax profit will be	97209/70*100		138870
Expected Revenue is calculated by Formula =		Expected Contribution/ P V Ratio
P V Ratio Is calculated by formula =		Contribution/Sales X100			91.67%
Expected Contribution =	Fixed Cost + Expected Profit
	678920+138870 =		817790
Expected Revenue=	817790/91.67%		892103
Expected Charges per Participant			1200
Number of Participant to earn After tax profit of 97209= 892103/1200					744
3) Calculation of profits for GSI
Option 1 = Flat fee $ 9500 per seminar
Option 2 = 40% of Profits of EU
Profits for GSI in case they receive flat fee $ 9500 per Seminar
Particulars	$
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% of profit that it earns
Hence Expected Revenue for EU Should be
Payment to GSI	62000
Since EU doesnot consider its fixed cost for decision minimum revenue expected
by EU will be 62000/91.67%					67634
Charges per Participant					1200
Number of Participant					57
For any number above 57 GSI will be benificial