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Fixed vs. Variable Compensation Example

Former G.E. chairman Jack Welch is highly sought after as a gust speaker. His fee can run as high as $100,000 for a single two-hour appearance. Recently, he was asked to speak at a seminar offered by the National Education Foundation (NEF). Due to the charitable nature of the organization, Mr. Welch offered to speak for $75,000. NEF planned to invite 250 guests who would each make a $500 contribution to the organization. The Foundation's executive director was concerned about committing so much of the organization's cash to this one event. So instead of the $75,000 fee she countered with an offer to pay Mr. Welch %50 of the revenue received from the seminar and no other payments.
a) Classify the two offers in terms of cost behavior (fixed vs. variable).
$75,000 fee:
50% of revenue:
b) Compute the budget income (assuming there are no other expenses) under each of the following scenarios:
1) NEF agrees to pay the $75,000 fee and 250 guests actually attend the seminar; and,
2) NEF pays Mr. Welch 50% of the revenue and 250 guests attend the seminar.

c) For each scenario ($75,000 fee vs. 50% of revenue), compute the percentage increase in profit that would result if the Foundation is able to increase attendance by 20 percent over the original plan (to a total of 300)
d) Explain how the two proposals affect NEF's potential profit from the seminar,

Solution Preview

b) 50% of revenue is variable cost


Budgeted Income
Fixed costs variable costs
Scenario 1 Scenario 2
Revenue 125000 125000
Costs 75000 62500

Budgeted ...

Solution Summary

The solution examines fixed versus variable compensation.