Question

You run a school in Florida. Fixed monthly cost is $5000 for rent and utilities, $3000 is spent in salaries and $500 in insurance. Also each student adds up to $90 expense per month for stationary, food etc. You charge $1000 per month from every student. You are considering moving the school to another neighborhood where the rent and utilities will increase to $8000, salaries to $5000 and insurance to $1000 per month. Variable cost per student will increase up to $150 per month. However, you can charge $1500 per student. At what point will you be indifferent between your current mode of operation and the new option?

Answer 1

Answer:

the indifference point is at 12.5

as there can't be 12.5 student it will be between 12 and 13 student per month.

Explanation:

the indifference point will be when the two alternatives yield the same result

(sales price - variable cost)Q - fixed cost = operating income

current scenario:

(1,000 - 90) Q - 8,500  

proposed scenario:

(1,500 - 150)Q - 14,000

We equalize each other and solve for Q

(1,000 - 90) Q - 8,500   =  (1,500 - 150)Q - 14,000

910Q - 8,500 = 1,350Q - 14,000

14,000 - 8,500 = (1,350 - 910)Q

        5,500     =       440Q

    5,500/440 =        Q

              12.5  =        Q