2. Midstate University is trying to decide whether to allow 100 more students in

Question

2. 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 30,900,000The 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.a. What is wrong with the president's calculation?b. What are the fixed and variable costs of operating the university?

Explanation / Answer

Number of students Total costs
4000 30,000,000
4100 30,300,000
4200 30,600,000
4300 30,900,000
The above calculation is with every increase 0f 100 students, the increase in cost is $300,000. This means with every 1 student, the increase in only $3,000. The Tuition fee is $5,000 per student. Therefore the increase of 100 students should be accepted.
The variable cost of one student is $3,000 as calculated above.
Therefore the variable cost of 4,000 students is 4000 X 3,000 = $12,000,000.
Fixed cost = Total cost – Variable cost
= 30,000,000 – 12,000,000
= $18,000,000

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