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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:
Number of Students Total Costs
4000 $30,000,000
4100 $30,300,000
4200 $30,600,000
4300 $30,900,000

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 = $7,286 per student. The president was wondering why the university should accept more students if the tuition is only $5000.

What is wrong with the president's calculation?

What are the fixed and variable costs of operating the university?

Solution Preview

From the data given, we see that the total costs increase by $300,000 per block of 100 students. We also see that adding 100 more students will generate $500,000 (100 X $5000) more revenue. Since there is an increase of $300,000 cost per block of 100 students, it can be deduced that fixed is $200,000 ...

Solution Summary

The solution determines the fixed, variable, and average costs.