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 $180,000 68,000 Fixed costs for the year: Salaries and benefits Facilities Travel and hotel Other Total fixed costs Variable cost per participant: Supplies and materials Marketing Other site costs N/A N/A $250,320 N/A $ 250,320 70,000 $318,000 47 *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.

Answer 1

1)
Break-even number of participants =  Fixed costs/Contribution margin per participant
Total Fixed costs (FC) = $318,000 from GSI + $250,320 from Eastern =	568,320
Contribution margin (CM) = $1,200 fee - ($47 + $18 + $35) variable costs =	1100
Break-even number of participants =  $568,320/1100	517	seminar participant per year
Break-even number of participants =  (Fixed costs + Target Operating  Profit )/Contribution margin per participant
Desired operating profit = net income / (1 - tax rate)
Desired operating profit = 247,296/ (1 -30%)	$ 353,280.00
Break-even number of participants =  ($568,320 + $353280 )/1100	838	participants per year
2)
GSI fees for flat fee option = $9,500 per seminar x 40 seminars =	$ 380,000.00
GSI fees for 40% of Eastern's profit-before-tax option = 40% x [(contribution margin x number of participants) -fixed cost) = .40 x [($1,100 x N) -$250,320)]	$      100,128
440 N - $100 128
GSI fees are equal for the two options at the following number of participants.
$380,000 = 440N -100128
N = $380000 + 100128 /440	$          1,091	Minimum number of participants