Sara Louchem

Case on Structure: Academy

Slide 1: First decision

1) Decision: Gina’s decision: hire 3 new experienced employees and give 1 week training.
a. I chose this decision because the current structure (with Gina and John) has a net income of 800$.
i. Revenues = 84*70$*10= $58,800
ii. COGS= ($20,000)
iii. Gross Profit= $38,800
iv. Salaries of John and Gina: (2*$19,000)= ($38,000)
v. Therefore, Net Income = $800.
b. If they spend more than $800 on training new employees, and those employees leave, they will be
operating at a loss and this will not be sustainable for them to stay in business.

2) Structure- with Gina’s option

a. Cluster coefficient= 0
i. Here the cluster coefficient is deemed to be zero because there are no triangles. This
means that after the employees get there 1 week training from Gina, they are expected to
be experienced and autonomous. This means that the salary expense will not be
increased due to inefficiencies or redundant trainings.

3) Risk/Return: For Gina’s decision, I looked at the risk level of the decision working perfectly and all 3
employees teach for the full year, or that there is turnover within the Academy and that only 2 teachers teach
for the full year. I also looked at the risk of only 1 employee teaching for the full year, which is worst case
scenario.

a. 3 employees teach for full year. This means that they can teach up to 210 students in the year
(84/2*5) since now John and Gina teach 84, so we are assuming 42 each, and all 3 employees can
teach the same amount.
i. Revenues= 210 students * $70 * 10 months= $147,000
ii. COGS (given)= ($20,000)
iii. Salaries of 5 teachers= ($95,000)
iv. Operating Income = $32 000
b. 2 employees teach for full year. This means that 168 students in year (42*4).
i. Revenues= 168 students * $70 * 10 months= $117,000
ii. COGS (given)= ($20,000)
iii. Salaries of 4 teachers= ($76,000)
iv. Operating Income = $21 000
c. 1 employee teaches for full year. This means that there are 126 students in the year (42*3)
i. Revenues= 126 students * $70 * 10 months= $88,200
ii. COGS (given)= ($20,000)
iii. Salaries of 3 teachers= ($57,000)
iv. Operating Income = loss = ($11 200)
d. Average Return of operating income
i. Average Risk and return= ($32 000 *0.33) +($21 000 *0.33) + 11 200*0.33)= $21 186

4) Standard Deviation: I also calculated the standard deviation in order to illustrate the volatility in the different
scenarios above.
a. Formula = Sqrt of: (32 000-21 186) sq + (21 000- 21 186)sq + (11 200 -21 186)sq= 14 720.64/3=
4906.67
b. Very high standard deviation. This shows that within Gina’s 1 decision, there are many outcomes,
depending on the capability of the teacher to stay and assuming that they will be able to teach and
 retain 42 students each for the entire year. This does seem like a profitable structure however,
since the COGs are relatively low due to the low cost of 1 week training.

Slide 5: Second decision

1) Decision: Gina’s decision: John creates a bigger class of 10 students for old students, new students get
new teachers, John spends 1 class each month with new group.

2) Structure- with new situation

a. Change in cluster coefficient: Because the new teachers are now dependent every month on
John, and the old students are also more dependent on John, the cluster coefficient went from
being non- existent in decision 1, to now being equal to:
i. Cluster coefficient=
1. Effective triangles= 3
2. Possible triangles= 9
3. Cluster coefficient = 3/9= 0.333
ii. Impact of cluster coefficient on salaries= (5* $19,000)*1.333= $126, 664.
1. Net impact of cluster coefficient = (126,664- 95 000)= $31, 664.
iii. The cluster coefficient is quite high. This is because John now has to spend a lot of time 5
classes per month assessing the teachers performance. He and Gina must also spend
time organizing the old students vs new students.

3) Risk/Return:
a. Revenues = 240 Students * 70$ *10 = $168 000
b. COGS= ($38,000)
c. Salaries of 5 teachers = ($95 000)
d. Cluster coefficient ( $31 664)
e. Operating Income = $ 3 336
f. The second decision leads to a net operating income of $ 3 336, which is not very significant. This
decision is very low risk however, since the Academy is running at full capacity, and therefore
revenues is ensured for the year.

Slide 5: Third decision

1) Decision: John’s decision to consolidate his teaching methods and make them available to teachers
2) Structure- with new situation

a. Change in cluster coefficient: The teachers are now looking at the methods and trainings of John
(which function as its own point since it is in a way a new department)
i. Cluster coefficient=
1. Effective triangles= 1
2. Possible triangles= 9
3. Cluster coefficient = 1/9= 0.111
ii. Impact of cluster coefficient on salaries= (5* $19,000)*1.111= $105 555
1. Net impact of cluster coefficient = (105 555- 95 000)= $10 555.
iii. The cluster coefficient is lower. This is because now the only connection for John is to his
teaching resources and materials. And Gina is still connected to the employees as she
 trained them and is available for questions. But John and Gina no longer have a monthly
and constant responsibility to assess the teachers.

3) Risk/Return:
a. Revenues = 240 Students * 70$ *10 = $168 000
b. COGS= ($38,000)
c. Salaries of 5 teachers = ($95 000)
d. Cluster coefficient ( $10 555)
e. Operating Income = $24 445
f. John’s decision would lead to an increase in operating income. It also holds very low risk since
there are vey little unknowns about this decision. John has all the knowledge and skill to be able to
establish and create these trainings and the teachers have the competence to receive them.

Slide 6: Final Decision

1) Decision: John’s decision to keep current structure and provide online courses
2) Structure- with new situation

a. Change in cluster coefficient: The online component is an additional link, but it does not create
any additional triangles, it is only John’s responsibility to upload material and videos to the online
platform.
i. Cluster coefficient=
1. Effective triangles= 1
2. Possible triangles= 12
3. Cluster coefficient = 1/12= 0.0833
ii. Impact of cluster coefficient on salaries= (5* $19,000)*1.0833= $102 916
1. Net impact of cluster coefficient = ($102 916- 95 000)= $7 916
iii. The cluster coefficient is lower. This is because now the only connection for John is to his
teaching resources and materials which he can then simply upload online.. And Gina is
still connected to the employees as she trained them and is available for questions. But
John and Gina no longer have a monthly and constant responsibility to assess the
teachers.

3) Risk/Return:
a. Revenues = 240 Students * 70$ *10 = $168 000
b. Online Revenues (estimate) = 100 students * 40$ *10= $40 000
i. Could be much more if more than 100 students. But this is the waitlist number of students,
so it was used as the estimated number.
c. COGS= ($38,000)
d. Marketing Campaign= ($50 000)
e. Salaries of 5 teachers = ($95 000)
f. Cluster coefficient ($7 916)
g. Operating Income = $17 085
h. John’s decision would lead to an decrease in net income. However, if there are more students that
take the online courses, it will be additional revenue at no additional cost for John. If the online
courses cost $40 per student, it would just take a minimum of 125 students for John and Gina to
break even. This means that using this option, if 240 students in class and 125 students online are
enrolled in a given year, profits will be high and John will be able to accomplish the following:
i. a. To lose the opportunity to share his knowledge with more people.
ii. b. To have few time to spend with Gina.
iii. c. To be able to attract new students if the current students, mastering the English thanks
to his method, decided it was enough.

4) Key takeaways: Here are a list of the observations made during this exercise:
a. As Gina tries to expand and grow the company, the cluster coefficient increases and the cost of
training, assessing and maintaining teaching quality also increases. This ultimately leads to lower
 returns. As seen in decision 1, when the outcomes are unpredictable (will a teacher stay or leave),
the standard deviation increases which means more volatility. The risk is higher, since the
outcomes are less predictable.
b. When other non-financial measures are important, they must be considered in the decision making
process. John does not want to grow and grow and only work. This is important since he is the core
of these operations and without his knowledge and ability to teach this to others, the business will
fail.
c. Because of the limited capacity of students and qualified teachers, growing and growing and
creating new schools and departments can end up decreasing net income rather than increasing it.