Question

Unemployment among high school graduates is quite high due to a recession. City Community College is considering a new program to help young people get the training they need to be more employable. The college has collaborated with the municipal hospital to build a nurse’s aide program, a 1-year program that would lead to immediate employment. Initial financial analysis indicates that the total fixed cost of the program will be $200,000, which includes the cost of a 1-year rental of the facilities plus utilities, insurance, and administrative costs. The variable cost and step cost together are $10,000 per student, which pays for faculty salary, student lunches, and teaching materials and textbooks. The state kicks in $5,000 per student, and the tuition based on market analysis is $6,000. Given that the nurse’s aide program has never been offered in the region before and will be under financial pressure due to current funding cuts, the college’s board of trustees would like to know how many students would need to be enrolled for the program to break even. The board also wants to know what other options it will have to mitigate these financial issues if the expected enrollment is below the break even point, given the high profile of the program at a time when employment and economic recovery are critical.Consider two possibilities: (1) Funding is limited to $100,000, or (2) with the benefit of efficiencies, variable and step costs can be reduced to $9,500. You are required to do a financial analysis of the proposed program. Please provide a spreadsheet solution and a written explanation of your approach.

Answer 1

Number of students to be Breakeven = 200

Under first option of financing with $100,000 - number of students to breakeven = 100

Under second option of reducing the variable and step cost - number of students breakeven = 134

Since the breakeven no. of students are lower under second option, hence second option of reducing variable and step cost from $10,000 to $9,500 is more viable.

Breakeven Analysis	Amount in $
Total fixed cost of programme	200,000
Variable and step cost per student	10,000
State fees	5,000
Tution fees	6,000
Total fees per student	11,000
Contribution Margin per student (excl. fixed cost)	1,000
No. of students requirement for Breakeven	= Fixed cost / Contribution Margin per student
	=200,000/1,000
No. of students requirement for Breakeven	200
1) If funding for the programme by $100,000	100,000
Net fixed cost	= Total fixed cost - amount from funding
	=200,000 -100,000
Net fixed cost	100,000
Breakeven no. of students	=100,000 /1,000
Breakeven no. of students	100
2) If variable cost can be reduced to $9,500	9,500
Contribution Margin margin per student	=11,000 - 9,500
Contribution Margin margin per student	1,500
Breakeven no. of students	=Original fixed cost / new contribution margin
	=200,000 / 1,500
Breakeven no. of students	134