Fixed, Variable, and Average Costs
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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?
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Solution Summary
The solution determines the fixed, variable, and average costs.
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 ...
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