Reference no: EM132533953

Ricky Bobby of NASCAR fame is highly sought after as a guest speaker. His fee can run as high as $150,000 for a single two-hour appearance. Recently, he was asked to speak at a seminar offered by the Driver R Us (DRU). Due to the charitable nature of the organization, Ricky Bobby offered to speak for $100,000. DRU planned to invite 350 guests who would each make a $500 contribution to the organization. The Foundation's executive director was concerned about committing so much of the organization's cash to this one event. So instead of the $100,000 fee she countered with an offer to pay Ricky Bobby 50% of the revenue received from the seminar and no other payments.

Required:

Question (a) Compute the budgeted income (assuming there are no other expenses) under each of the following scenarios:

1) DRU agrees to pay the $100,000 fee, and 350 guests actually attend the seminar; and

2) DRU pays Ricky Bobby 50% of revenue, and 350 guests attend the seminar.

Question (b) For each scenario ($100,000 fee vs. 50% of revenue), compute the percentage increase in profit that would result if DRU is able to increase attendance by 20 percent over the original plan (to a total of 420). (Round the percentages to the nearest whole numbers.)

Question (c) Summarize the impact on risk and profits of shifting the cost structure from fixed to variable costs