Saturday, 29 November 2014

State University Business School (SUBS) offers several degrees, including Bachelor of Business Administration (BBA).

State University Business School (SUBS) offers several degrees, including Bachelor of Business Administration (BBA).

STATE UNIVERSITY BUSINESS SCHOOL, BBA DEGREE
Degree Income Statement
For the Academic Year Ending June 30
  Revenue $ 2,110,000   
  Costs    
    Advertising—BBA program   86,000   
    Faculty salaries   1,075,000   
    Degree operating costs (part-time staff)   185,000   
    Building maintenance   196,000   
    Classroom costs (building depreciation)   436,000  
    Allocated school administration costs   226,000  
 

  Total costs $ 2,204,000   
 

  Net loss $ -94,000  
 



 


The dean of the Business School is considering expanding the BBA program by offering an evening program in a nearby city. The program would be the same size (in terms of students). The school’s CFO estimates that the combined BBA revenue (on-campus plus the evening program) will be twice the current revenue, as shown in the above table. Because the evening program will be new, advertising expenses for the evening session will be three times their current level. Faculty salaries will double. Degree operating costs will increase by 50 percent. Building maintenance and classroom costs will remain unchanged, but classroom space will be rented at a cost of $155,000 per academic year. School administration costs will increase by $21,000 , and allocated school administration costs (for both programs) will be $315,000 per academic year.

 

Explanation:
The following differential analysis shows that the combined contribution of the BBA program will be positive.

Revenue: $2,110,000 × 2 = $4,220,000
Costs:
  Advertising – BBA program: 86,000 + (86,000 × 3 ) = 344,000
  Faculty salaries: 1,075,000 × 2 = 2,150,000
  Degree operating costs: 185,000 × 1.5 = 277,500