Fixed,Variable,and Average Costs
Midstate University is trying to decide whether to allow 100 more students into the university.Tuition is $5000 per year.The controller has determined the following schedule of costs to educate students: The current enrollment is 4200 students.The president of the university has calculated the cost per student in the following manner:$30,600,000/4200 students = $7286 per student.The president was wondering why the university should accept more students if the tuition is only $5000.
Required:
a.What is wrong with the president's calculation?
b.What are the fixed and variable costs of operating the university?

Question

Fixed,Variable,and Average Costs
Midstate University is trying to decide whether to allow 100 more students into the university.Tuition is $5000 per year.The controller has determined the following schedule of costs to educate students:  The current enrollment is 4200 students.The president of the university has calculated the cost per student in the following manner:$30,600,000/4200 students = $7286 per student.The president was wondering why the university should accept more students if the tuition is only $5000.
Required:
a.What is wrong with the president's calculation?
b.What are the fixed and variable costs of operating the university?

Quizplus · Accepted Answer

The Answer is Solution to Fixed,Variable,and Average Costs (15 minutes)
a.The president of the university has calculated the average cost of each student.If the decision is to add more students,the president should be looking at the marginal cost of another student.The marginal cost can be approximated by the variable cost as long as the university is below capacity.
b.The cost of adding 100 students is $300,000.Therefore,the variable cost per unit is $300,000/100,or $3,000/student.The total variable cost of 4,000 students is (4,000 students)($3,000/student)or $12,000,000.The remaining cost at 4,000 students is $30,000,000 - $12,000,000 or $18,000,000,which is equal to the fixed costs.

Fixed,Variable,and Average Costs Midstate University Is Trying to Decide Whether to Allow 100