The Equine Management Academy (EMA) which was founded in 1990 is a privately owned organisation located in Hartland, a developing country which has a large agricultural sector and where much transportation is provided by horses. EMA operates an Equine College which provides a range of undergraduate and postgraduate courses for students who wish to pursue a career in one of the following disciplines:
Equine (Horse) Surgery
Equine Dentistry, and E
quine Business Management.
The Equine College which has a maximum capacity of 1,200 students per annum is currently the only equine college in Hartland.
The following information is available:
(1) A total of 1,200 students attended the Equine College during the year ended 31 May 2010. Student mix and fees paid were as per the following table:
(2) Total operating costs (all fi xed) during the year amounted to $6,500,000.
(3) Operating costs of the Equine College are expected to increase by 4% during the year ending 31 May 2011. This led to a decision by the management to increase the fees of all students by 5% with effect from 1 June 2010. The management expect the number of students and the mix of students during the year ending 31 May 2011 to remain unchanged from those of the year ended 31 May 2010.
(4) EMA also operates a Riding School at which 240 horses are stabled. The Riding School is open for business on 360 days per annum. Each horse is available for four horse-riding lessons per day other than on the 40 days per annum that each horse is rested, i.e. not available for the provision of riding lessons. During the year ended 31 May 2010, the Riding School operated at 80% of full capacity.
(5) Horse-riding lessons are provided for riders in three different skill categories. These are ‘Beginner’, ‘Competent’ and ‘Advanced’.
During the year ended 31 May 2010, the fee per riding lesson was as follows:
(6) Total operating costs of the Riding School (all fi xed) amounted to $5,750,000 during the year ended 31 May 2010.
(7) It is anticipated that the operating costs of the Riding School will increase by 6% in the year ending 31 May 2011. The management have decided to increase the charge per lesson, in respect of ‘Competent’ and ‘Advanced’ riders by 10% with effect from 1 June 2010. There will be no increase in the charge per lesson for ‘Beginner’ riders.
(8) The lesson mix and capacity utilisation of the Riding School will remain the same during the year ending 31 May 2011.
Required:
(a) Prepare a statement showing the budgeted net profi t or loss for the year ending 31 May 2011. (7 marks)
Some time ago the government of Hartland, which actively promotes environmental initiatives, announced its intention to open an academy comprising an equine college and riding school. The management of EMA are uncertain of the impact that this will have on the budgeted number of students and riders during the year ending 31 May 2011, although they consider that due to the excellent reputation of the instructors at the riding school capacity utilisation could remain unchanged, or even increase, in spite of the opening of the government funded academy. Current estimates of the number of students entering the academy and the average capacity utilisation of the riding school are as follows:
Required:
(b) (i) Prepare a summary table which shows the possible net profi t or loss outcomes, and the combined probability of each potential outcome for the year ending 31 May 2011. The table should also show the expected value of net profi t or loss for the year; (9 marks)
(ii) Comment briefl y on the use of expected values by the management of EMA; (3 marks)
(iii) Suggest three reasons why the government of Hartland might have decided to open an academy comprising an equine college and a riding school. (6 marks)