A firm operates two lines of business, pre-school education and weekend adult ed

Question

A firm operates two lines of business, pre-school education and weekend adult education classes, using a common classroom building. The building also has three offices for the firm’s president/owner, accountant and marketing specialist. The day care uses the building Monday-Friday during the day (6:00 am – 5:30 pm) while the adult education uses the building in the evenings (5:30 pm – 10:30 pm) and all day on Saturday-Sundays. The firm wants to determine whether the adult education “pays its own way”. That is, the firm wants to know whether to keep the adult education or drop it.

a. Of the following list of costs and revenues in the table below, which items are relevant to calculating the contribution (profit or loss) of adult education and why?

b. If there are common costs, would you allocate them? If yes, how? If no, why not?

c. What factors should determine whether to keep or drop the adult education?

Mortgage on the building Pre-school supplies Monthly heat and lighting for the building Adult education supplies Snow removal/parking lot maintenance Pre-school revenues Pre-school teacher salaries Adult education revenues Adult education teacher salaries Pre-school advertising expenses The firm’s president’s salary Adult education advertising expenses The firm’s accountant’s salary Building maintenance and cleaning The firm’s marketing specialist’s salary

Explanation / Answer

- Pre-school teacher salaries

- Adult education supplies

- Adult education advertising expenses

- Mortgage on the building

= Monthly heat and lighting for the building

- Snow removal/parking lot maintenance

- The firm’s president’s salary

- The firm’s accountant’s salary

- The firm’s marketing specialist’s salary

- Building maintenance and cleaning

           3. Total cost

           4. Adult education revenues

Allocation can be done based on the number of students in the adult-education class.

The total contribution margin from adult-education is the first criterion. Then if by itself it is not generating profits, it is to be examined whether total revenues of the school increases when the adult-program is there. In otherwords, the marginal increase in revenues due to adult-edu program is to be compared to the total costs. Further, it is to be examined whether the fixed costs are covered by running the both the programs together.

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