Author: terry.beachy
Last saved by: Terry Beachy
Company: Garrett College

Terry Beachy
OMDE 606
October 18, 2010
Assignment 1

Cost Analysis
1.	Classify the different cost items as either fixed or variable costs (matching row number to Fixed or Variable as appropriate). 
Answer: Items under A and B are fixed costs, all cost items under C are variable costs (lines 24 and 25 are semi-variable) (Rumble, 1997, p.23-24)

2.	Calculate the aggregate Fixed Costs of Development (FD) and the aggregate Fixed Costs of Maintenance (FM).
Answer:  FD = $282750
FM = $13200 
F = FD + FM - $295950

3.	Calculate the variable cost per student (V) 
Answer: V = $509.07 (Rumble, 1997, p.29)

4.	Calculate the depreciation rate on a basis of the lifetime of the presentation of the project (compare Rumble Table 6.1) and charge it to each year of presentation. (You may use the format of the attached spreadsheet.) 
Answer: 
Depreciation rate FD = $47125 
Depreciation rate FM = $4400 (Rumble, 1997, p.43)

5.	Following the template of Rumble Table 6.4, annualize the Fixed Costs of Development (FD) over the eight years of presentation at 6.5 % interest and the Fixed Costs of Maintenance (FM) over three years at the same rate. 
Answer: 
Annualization rate FD = $46438 
Annualization rate FM = $4984 
Total = $386456 (Rumble, 1997, p.48)

6.	Summarize in your own words (!) in a short paragraph the reasons for and against annualization. 
Answer: Annualization is useful to financial analysts to foresee an economic forecast and thus, a company’s financial health and ballpark figure probable earnings. Generally this could be a good thing to forecast the returns over a year, however with the volatile stock market nothing is average, thus highly inaccurate. Annualization is also handy for those companies that are required to make estimated tax payments, thus they can annualize their current profits in order to ensure correct payments to the Internal Revenue Service. When thinking to annualize, one must consider if the money could be used elsewhere (opportunistic). If so, annualize, if not use simple depreciation. (Rumble, 1997, p.42)

7.	Calculate the equation of total costs (TC=F+VxN) using the annualized figure of fixed costs and N=960 
Answer: TC (N) = $386456 +$509.07*N
For N = 960
TC (960) = $386456 + $509.07* 960  = $875163.2 (Rumble, 1997, p.35)

8.	Draw the graph of the total cost function using, as above, the annualized figure of fixed costs while N varies over the accumulated number of students (i.e. N= 120, 240, … etc.) 
Answer: See Attached spreadsheet (Rumble, 1997, p.35)

9.	Calculate the equation of average costs (AC=F/N+V) using the annualized figure for fixed costs and N=960 
Answer: 
AC(N) = ($386456/N) + $509.07
For N = 960
AC (960) = ($386456/960) + $509.07 = $911.62 (Rumble, 1997, p.35)

10.	Draw the graph of the average cost function, using, as above, the annualized figure of fixed costs while N varies over the accumulated number of students (i.e. N= 120, 240, … etc.)  Answer: See Attached spreadsheet (Rumble, 1997, p.35)
 
11.	If the student is charged the per student fee specified calculate the break-even point. (Use the equation TC=F+VxN and the income equation: I=SFxN (Income =Student fee x No of students). The break-even point is N=F/(SF-V) 
Answer: 
N = $386456/($2340-$509.07) = 211 (Rumble, 1997, p.35)

12.	Represent the breakeven point graphically (overlaying the graphs of TC and I). 
Answer: See Attached spreadsheet (Rumble, 1997, p.39)

13.	Summarize in your own words (!) in a short paragraph why it is believed that the TC and AC equations and the specific cost structure of DE suggests that DE may be more cost-efficient than conventional modes of educational provision.
Answer: Governments are all about cost efficiencies. Thus, if enough students attend along with the mass production of learning materials combined with the reduced need for an instructor (substitute with tutors), DE can be a success, hence the need to scrutinize the totals costs and average costs.  Additionally DE is global, thus an infinite number of students can attend. There is the real potential that DE can be delivered at a lower cost per student as capital costs would be decreased, hence no need for a classroom and its furnishings. 
Reference: Rumble, G. (1997). The Costs and Economics of Open and Distance Learning. London : Kogan Page.