In addition, businesses must build a framework for increasing their profitability that minimizes costs and maximizes revenues. They need to analyze the activities of an organization and arrange them in a way that gives the company the most benefit. Different methods are available to help them analyze their tasks and select the best way to organize them such as scenario analysis, simulation and if so, analysis. This report offers an overview of Porpoise swim school’s operations in order to encourage owners to establish an agreement that maximizes the profits of businesses.
Proper application of the what-if method of analysis to a business case begins with some assumptions concerning an enterprise. Some of the suppositions made in the case of the Porpoise Swim School are the rate of pay for the instructors will remain the same as the previous period, instructors with the lowest pay (since it is based on experience and qualifications) get classes where children perform minimal activities (the Penguin class) and the business is able to attract the same number of students as the previous term.
The next step is to identify the costs and revenues. First, the business pays a receptionist. The salary given to the receptionist is a fixed cost since the person comes to work whenever there are classes. The situation differs from that of the instructors who receive their pay based on the number of classes that they teach. The swim school pays the receptionist a flat rate of $22 per hour. Since each class lasts for half an hour, the receptionist gets $11 per class. Second, the business incurs variable costs mostly in the form of instructor pay. Pay rates for the teachers vary with the number of the number of classes that a person teaches. As a result, this expense is a variable cost for the business.
After categorizing the expenses of the business, it is possible to go ahead and conduct the what-if analysis. The table below shows the analysis where the business owner seeks to understand the impact of the Penguin classes that were added to the school’s programs in the third term.
The upper table shows the profits of the business for two types of classes, penguin and starfish. The values are calculated per individual student, but the total received column gives the amount for the entire class. The penguin class costs $140 per term, and the school had 12 children in that class. The cost of the instructor is $84 for all the seven classes that the children attend in a term. An assumption is made that the instructor with the least experience and qualifications gets this type of class since the students learn the basics of swimming. The total amount per student after reducing the instructor cost is $56. If the same instructors teach the starfish classes, the amount drops to $48 since the instructors get a pay of $12 per class for four classes. The total amount per student is $127. After deducting the fixed cost of the receptionist (charged at $22 per hour with classes lasting half an hour) the total amount per student is $172. The total profit for all the student in the penguin and starfish classes is $2,098.
The second table shows the what-if analysis where the business owner removes the penguin classes and moves the students in that class to the starfish swimming lessons. In this case, the number of students rises to 44. The amount paid by each student remains $175. The rate for the instructor in the class in this case remains the same $48. Finally, the fixed cost of the receptionist is also deducted from the amount giving a profit of $105 per child. The total amount for all the students in the class rises to $5,478.
Other Factors Affecting Performance
The business has additional factors that affect its performance. One of the most important factors to consider is competition from other schools. The swim school has to deal with the presence of other businesses that want to attract the same customers. Competition affects revenues because it determines the number of children who enroll into its classes. High competition would result in a low number of students while low competition makes it easier for the business to appeal to more children.
Another factor that affects the performance of the business is the cost of the instructors. Hiring instructors with high qualifications and experience means that the business has to incur additional costs. Because the instructor rate is a variable expense that depends on the nature of the class, the total amount paid to instructors will affect the profitability of the business. However, it is important for the business to consider the safety and satisfaction of customers. This issue means that the business must have some highly experienced instructors among its staff.
This report has presented a what-if analysis of a swim school that can help the owner make a decision that maximizes revenues and minimizes cost. It shows that the penguin classes that the owner added to the school have little value since they have led to an increase in the cost of operations without a comparable increase in revenues. The situation increases the potential for problems since in the long-run the costs may outweigh the income.
From the analysis of the business, it is possible to make some recommendations to the business owner that can enhance the enterprise’s performance. First, the enterprise owner should consider removing the penguin classes from the school’s programs. The increase in expenses without an equivalent rise in the revenues the business generates from the program makes it likely that the business will encounter problems as it continues to operate. Additional costs force the owner to take some of the income derived from the other classes to cover the costs of the penguin classes making the entire business less profitable.
Second, the owner of the business has to take strict control of the variable expenses of the business, especially the instructor pay. Although the safety of the children during classes and their satisfaction with the classes is an integral part of the sustainability of the business, the instructor costs has a major effect on the cost of operations for the business. The owner must strive to achieve a balance between the customer satisfaction and safety and cost control. Developing a standard number of highly qualified instructors that the school will hire can help the business owner manage the expenses. The owner is able to predict the cost of the instructors while working to attract more students.