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Contribution margin ratio; break-even point in dollar sales

Madison Musical Education Company (MME) provides instrumental music education to children of
all ages. Payment for services comes from 2 sources: (1) a contract with Country Day School to provide
private music lessons for up to 150 band students a year (where a year is 9 months of education)
for a fixed fee of $150,000, and (2) payment from individuals at a rate of $100 per month for 9 months
of education each year. In the 2003รข?"2004 school year, MME made a profit of $5,000 on revenues of

Country Day School contract 150,000
Private students 145,000
Total revenues 295,000
Administrative staff 75,000
Teaching staff 81,000
Facilities 93,500
Supplies 40,500
Total expenses 290,000
Profit 5,000

MME conducted an activity analysis and found that teaching staff wages and supplies costs are
variable with respect to student-months. (A student-month is one student educated for one month.)
Administrative staff and facilities costs are fixed within the range of 2,000 to 3,000 student-months.
At volumes between 3,000 and 3,500 student-months, an additional facilities charge of $8,000 would
be incurred. During the last year, a total of 2,700 student-months of education were provided, 1,450 of
which were for private students and 1,250 of which were offered under the contract with Country Day

1. Compute the following using cost information from year 2003-2004 operations:
Fixed cost per year
Variable cost per student-month
2. Suppose that in 2004-2005 Country Day School decreased its use of MME to 120 students (that
is, 1,080 student-months). The fixed contract price of $150,000 was still paid. If everything else
stayed as it was in 2003-2004, what profit or loss would be made in 2004-2005?
3. Suppose that at the beginning of 2004-2005 Country Day School decided not to renew its contract
with MME, and the management of MME decided to try to maintain business as usual with
only private students. How many students (each signing up for 9 months) would MME require to
continue to make a profit of $5,000 per year?

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Solutions Guide: Please reword the answers to essay type parts so as to guarantee that your answer is an original. Do not submit as your own.

1. Fixed cost = $75,000 + $93,500 = $168,500
Variable cost per student month = ($81,000 + $40,500) ...

Solution Summary

Contribution margin ratios and break-even point in dollar sales is examined.