# Effects of operating leverage on profitabilityCMAs R Us conducts CMA review courses.

Effects of operating leverage on profitability

CMAs R Us conducts CMA review courses. Public universities that permit free use of a classroom support the classes. The only major expense incurred by CMAs R Us is the salary of instructors, which is \$7,500 per course taught. The company recently planned to offer a review course in Dallas for \$400 per candidate; it estimated that 50 candidates would attend the course. Complete these requirements based on the preceding information.

Part 1.

Required

a. Relative to the number of CMA candidates in a single course, is the cost of instruction a fixed or a variable cost?

b. Determine the profit, assuming that 50 candidates attend the course.

c. Determine the profit, assuming a 10 percent increase in enrollment (i.e., enrollment increases to 55 students). What is the percentage change in profitability?

d. Determine the profit, assuming a 10 percent decrease in enrollment (i.e., enrollment decreases to 45 students). What is the percentage change in profitability?

e. Explain why a 10 percent shift in enrollment produces more than a 10 percent shift in profitability. Use the term that identifies this phenomenon.

Part 2.

The instructor has offered to teach the course for a percentage of tuition fees. Specifically, he wants \$150 per candidate attending the class. Assume that the tuition fee remains at \$400 per candidate.

Required

f. Is the cost of instruction a fixed or a variable cost?

g. Determine the profit, assuming that 50 candidates take the course.

h. Determine the profit, assuming a 10 percent increase in enrollment (i.e., enrollment increases to 55 students). What is the percentage change in profitability?

i. Determine the profit, assuming a 10 percent decrease in enrollment (i.e., enrollment decreases to 45 students). What is the percentage change in profitability?

j. Explain why a 10 percent shift in enrollment produces a proportional 10 percent shift in profitability.

Part 3.

CMAs R Us sells a workbook to each student who attends the course. The workbook contains printed material unique to each course. Workbooks that are not sold must be destroyed. Prior to the first class,

CMAs R Us printed 50 copies of the books based on the estimated number of people who would attend the course. Each workbook costs \$40 and is sold for \$50. This cost includes a royalty fee paid to the author and the cost of duplication.

Required

k. Calculate the total cost and the cost per candidate of the workbooks, assuming that 45, 50, or 55 candidates attempt to attend the course.

l. Classify the cost of workbooks as fixed or variable relative to the number of candidates 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.

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