Question

A major issue of contention at many colleges concerns the cost of meals that is rebated when a student does not sign up for the meal plan. The administration usually says that it should rebate only the marginal cost of the food alone, which is calculated at, say, $1.25 per meal. Students say that the marginal cost should include more costs, such as the saved space from fewer students using the facilities and the reduced labor expenses on food preparation. This can raise the marginal cost to $6.00.

a. Who is correct, the administration or the students?

b. How might your answer differ if this argument were being conducted in the planning stage before the dining hall is built?

c. If you accept the $1.25 figure of a person not eating, how could you justify using a higher figure of about $6.00 for the cost of feeding a guest at the dining hall, as many schools do?

Answer 1

a) The college administration is considering the marginal cost while the students are arguing about the inclusion of core cost. Now the demand from students to include savings from fewer student occupation is actually a fixed cost and so it can not be excluded. The reduced labor expenses is again depends upon the labor wage rate. If the labor wage rate is charged per person for food preparation then students have a valid argument but if it is on the basis of per hour or per day then the administration is incurring the cost. So whether student opt it or not and administration is right in this case.

b) If the administration has data about students opting for the meal service then it can build the dining hall according to the expected number and it will have to incur lower cost. The building of dining hall is a fixed cost and the administration can change that at planning stage. However, it will need to be considered after it has incurred in case of pricing the meal.

c) The rebate of only $1.25 for students who have decided to opt out of the program is quite low because it does not include the variable cost of raw material or food. The demand from the students for rebate of $6.00 is unrealistic because it does not include the fixed cost componenet.
If a student is opting out of the program then administration is saving only variable cost associated with that. Ideally, the rebate amount should be slightly higher than $1.25 but it can not be as high as $6.00.