Question

Despite the fact that the re-employment mission of Polyville Correction Center currently loses $1.04 per inmate per day, if 20 more inmates were added to the re-employment mission (bringing the total inmates up 200 for the entire center) the financial situation of the center would improve. Explain how that is possible and what that tells you about fixed, variable, and step costs?

Answer 1

In this situation the initial case tells that there is a loss of -1.04 per day. In order to analyse the situation the following are reasonable justification for the case.

• The correctional facility has a constant and fixed amount of Fixed Costs per month which remains constant irrespective of the number of inmates.
• The correctional facility receives a specified amount of cash grant from the govt per inmate .
• The variable costs include the daily fooding and other expenditure for a single inmate per day.
• Step costs can be assumed as a cost which remains constant upto a specified level of capacity . For example. In this case 200 inmates can be accommodated in a single building without the requirements for any new building.
• So irrespective of whether it is 1 inamte or 200, the step costa remain same UPTO the level 200.

Now when 20 more inmates are included.

The grants component received per inmate increases.

The Variable cost expense increase only by the amount (20x v.cost per inmate)

Fixed Cost Remains the same.(like salaries of warden)

Step costs also remain same upto the limit of 200 inmate.

hence finally the Operating Income of the Polyville correction centre increase.

The Accounting format is as follows

Total Revenue Grants

- Total Variable Expenses

----------------------------

Contribution Margin

-Fixed Costs( Same)

-Step Costs (Same)

--------------------

Operating Income (Increases)

Thanks