Effects of fixed and variable cost behavior on the risk and rewards of business opportunities
Green Club and Wood Club are competing health and recreation clubs in Chicago. They both offer tennis training clinics to adults. Green pays its coaches $6,000 per season. Wood pays its coaches $200 per student enrolled in the clinic per season. Both clubs charge a tuition fee of $300 per season.
a. Prepare income statements for Green and Wood, assuming that 30 students per season attend each clinic.
b. The ambitious new director of Green Club tries to increase his market share by reducing the club’s tuition per student to $180 per clinic. Prepare an income statement for Green, assuming that the club attracts all of Wood’s customers and therefore is able to enroll 60 students in its clinics.
c. Independent of Requirement b,Wood Club tries to lure Green’s students by lowering its price to $180 per student. Prepare an income statement for Wood, assuming that the club succeeds in enrolling 60 students in its clinics.
d. Explain why the strategy described in Requirement b produced a profit while the same strategy described in Requirement c produced a loss.
e. Prepare an income statement for Green Club and Wood Club, assuming that 18 students attend a clinic at the original $300 tuition price.
f. It is always better to have fixed rather than variable cost. Explain why this statement is false.
g. It is always better to have variable rather than fixed cost. Explain why this statement is false.