Case Study on Lihue University

Lihue University Lihue University was formed in 1898 in Columbus, Ohio. While the university has prospered over the years, it has been losing money for the last several years. The president of the university has established a Strategic Leadership Team, (SLT) to evaluate the current financial situation and offer alterative strategies for improvement. One of the key issues identified by the SLT was increasing levels of student enrollment. Presently, Lihue University is trying to decide whether to allow 100 additional students into the university. Tuition is set at $5,500 per year. The controller has determined a schedule of costs to educate students at various enrollment levels. At 5000 students the university’s total costs equal $30,000,000; at 5100 students the university’s total costs equal $30,300,000; at 5200 students the university’s total costs equal $30,600,000; and at 5300 students the university’s total costs equal $30,900,000. The current level of enrollment at the university is 5200 students. The president of the university has calculated the cost per student in the following manner: $30,600,000 / 5200 students = $5,885 per student. The president was wondering why the university should accept more students if the tuition is only $5,500. “It seems to me that we would be losing $385 per additional student”, the president was overheard saying to an SLT member.

Required: 1. What are the total fixed costs of operating the university?

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2. What are the variable cost and contribution margin per student at the university?

3. What is the breakeven point in terms of units and tuition revenue dollars for Lihue University?

4. Should the additional 100 students be admitted to the university and what is your rationale?

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