you are considering starting a cosmetology school. your fnancial projections for

Question

you are considering starting a cosmetology school. your fnancial projections for the first year of operations are as follows: assume that all costs are fixed except supplies which are variable.

number of students enrolled 500
wages and benefits $70,000
rent $1000
depreciation $ 30,000
utilities. $2,500
supplies $7,000
administrative supplies $5000

a. what is the schools underlying cost structure?

b. what are the schools expected total costs

c. what are the schools estimated total costs at 1000 students? at 1500 students?

d. what is the average cost per student at $550, $1100 and 1650 a student?

Explanation / Answer

(a) The schools underlying cost structure = Fixed Cost + (Variable Cost x Volume)

Fixed Cost = Rent +Utilities+ Wages & Benefits + Depreciation = $1,000 + $2,500 + $70,000 + $30,000 = $ 103,500

Variable Cost per unit = (Supplies + Administrative Supplies) / Volume = ($7,000 + $5,000) / 500 = $ 24 per unit

Underlying cost structure = $ 103,500 + ($ 24 x 500) = $ 115,500

(b) The schools expected total costs = Fixed cost + Variable cost = $ 103,500 + $ 12,000 = $ 115,500

(c) Estimated total costs at 1,000 students = $ 103,500 + ($24 x 1,000) = $ 127,500

Estimated total costs at 1,500 students = $ 103,500 + ($24 x 1,500) = $ 139,500

(d) For 550, it is [$103,500 + ($24 x 550)] / 550 = $ 212.18

For 1,100 it is [$103,500 + ($24 x 1,100)] / 1,100 = $ 118.10

For 1,650 it is [$103,500 + ($24 x 1,650)] / 1,650 = $ 86.73

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