Question:
Swim Co offers training courses to athletes and has prepared the following breakeven chart：
Required：
(a)State the breakeven sales revenue for Swim Co and estimate, to the nearest $10,000, the company‘s profit if 500 athletes attend a training course.
(b)Using the chart above,explain the cost and revenue structure of the company.
Answer:
(a)The breakeven sales revenue for Swim Co is $90,000. The company‘s profit, to the nearest $10,000, if 500 athletes attend the course is $20,000 ($140,000 - $120,000). (From the graph, it is clear that the precise amount will be nearer $17,000, i.e. $140,000 - approximately $123,000.)
(b)Cost structure
From the chart, it is clear that Line C represents fixed costs, Line B represents total costs and Line A represents total revenue.
Line C shows that initially, fixed costs are $20,000 even if no athletes attend the course. This level of fixed costs remains the same if 100 athletes attend but once the number of attendees increases above this level, fixed costs increase to $40,000.
Line B represents total costs. If 100 athletes attend, total costs are $40,000($400 per athlete).Since $20,000 of this relates to fixed costs, the variable cost per athlete must be $200. When fixed costs step up beyond this point at the level of 200 athletes, total costs obviously increase as well and Line B consequently gets much steeper. However, since there are now 200 athletes to absorb the fixed costs, the cost per athlete remains the same at $400 per athlete($80,000/200), even though fixed costs have doubled.
If 300 athletes attend the course, total cost per athlete becomes $300 each ($90,000/300).Since fixed costs account for $40,000 of this total cost, variable costs total $50,000, i.e. $166﹞67 per athlete. So, economies of scale arise at this level,as demonstrated by the fact that Line B becomes flatter.
At 400 athletes, the gradient of the total costs line is unchanged from 300 athletes which indicates that the variable costs have remained the same. There is no further change at 500 athletes;fixed and variable costs remain steady.
Revenue structure
As regards the revenue structure, it can be seen from Line A that for 100每400 athletes the price remains the same at $300 per athlete. However, if 500 athletes attend, the price has been reduced as the total revenue line becomes flatter. $140,000/500 means that the price has gone down to $280 per athlete. This was obviously necessary to increase the number of attendees and at this point, profit is maximised.
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