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# CVP analysis and Decision theory

1. The college of Business at tech is planning to begin an online MBA program. The initial start-up cost for computing equipment, facilities, course development is \$350,000. The college plans to charge tuition f \$18,000 per student per year. However, the university administration will charge the college \$12,000 per student for the first 100 students enrolled each year for administrative costs and its share of the tuition payments.

a. How many students does the college need to enroll in the first year to break even?
b. If the college can enroll 75 students the fist year, how much profit will it make?
c. The college believes it can increase tuition to \$24,000, but doing so would reduce enrollment to 35. Should the college consider doing this?

2. Microcomp is a U.S. based manufacturer of personal computers. It is planning to build a new manufacturing and distribution facility in either South Korea, China, Taiwan, the Philippines, or Mexico. It will take approximately 5 years to build the necessary infrastructure (roads, etc.), construct the new facility, and put it into operation. The eventual cost of the facility will differ between countries and will even vary within countries depending on the financial, labor, and political climate, including monetary exchange rates. The company has estimated the facility cost (in 1,000,000s) in each country under three different future economic and political climates, as follows:

ECONOMIC/POLITICAL CLIMATE
Country Decline Same Improve
South Korea 21.7 19.1 15.2
China 19.0 18.5 17.6
Taiwan 19.2 17.1 14.9
Philippines 22.5 16.8 13.8
Mexico 25.0 21.2 12.5

Determine the best decision, using the following decision criteria.
a. Minimin
b. Minimax
c. Hurwicz (a = .4)
d. Equal likelihood

#### Solution Preview

Please refer attached file for better clarity of tables.

1.
a. How many students does the college need to enroll in the first year to break even?
Fixed Cost=F=\$350,000
Variable Cost per student=V=\$12,000
Tuition Fee=P=\$18,000
Break even Point=F/(P-V)= 58.33333333
It should enroll about 59 students to break even.

b. If the college can enroll 75 students the fist year, how much profit will it make?
Number of enrollment=Q=75
Fixed Cost=F=\$350,000
Variable Cost per student=V=\$12,000
Tuition Fee=P=\$18,000
Total Revenue=P*Q=\$1,350,000
Total Cost=F+V*Q=\$1,250,000
Profit=Total Revenue-Total Cost=\$100,000

c. The college believes it can increase tuition to \$24,000, but doing so would reduce enrollment to 35. Should the college consider doing this?
Number of enrollment=Q=35
Fixed Cost=F=\$350,000
Variable Cost per student=V=\$12,000
Tuition Fee=P=\$24,000
Total Revenue=P*Q=\$840,000
Total Cost=F+V*Q=\$770,000
Profit=Total Revenue-Total Cost=\$70,000

We find that profit has decreased. It should not increase the ...

#### Solution Summary

There are two problems. Solution to first problem depicts the steps to determine break even number of students. It also studies the possibility of increasing fee for the students. Solution to second problem depicts the steps to choose the county based upon different decision criteria.

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