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You run a school in Florida
You run a school in Florida. Fixed monthly cost is $5,254.00 for rent and utilities, $5,834.00 is spent in salaries and $1,034.00 in insurance. Also every student adds up to $100.00 per month in stationary, food etc. You charge $697.00 per month from every student now.You are considering moving the school to another neighborhood where the rent and utilities will increase to $11,153.00, salaries to $6,174.00 and insurance to $2,159.00 per month. Variable cost per student will increase up to $188.00 per month. However you can charge $1,044.00 per student. At what point will you be indifferent between your current mode of operation and the new option?
Expert Solution
Determination of Indifferent Point between Current Mode of Operation and the New Option:
Let the indifference point be x students.
For Florida,
Costs = Rent and utilities + Salaries + Insurance + Variable Cost per Student
= $5,254 + $5,834 + $1,034 + $100x
Fees from Students = $697x
Net Profit = $697x - ($5,254 + $5,834 + $1,034 + $100x)
For New Neighbourhood,
Costs = Rent and utilities + Salaries + Insurance + Variable Cost per Student
= $11,153 + $6,174 + $2,159 + $188x
Fees from Students = $1,044x
Net Profit = $1,044x - ($11,153 + $6,174 + $2,159 + $188x)
At indifference point, net profit will be equal for both
$697x - ($5,254 + $5,834 + $1,034 + $100x) = $1,044x - ($11,153 + $6,174 + $2,159 + $188x)
$697x - $12,122 - $100x = $1,044x - $19,486 - $188x
$597x - $12,122 = $856x - $19,486
$856x - $597x = $19,486 - $12,122
$259x = $7,364
x = $7,364/$259 = 28.43 or 28 students.
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