This exercise continues the topic from pages 435-436 (The limitations and assumptions of costing) of the textbook and provides a further example to help you appreciate how fixed costs can rise in steps as production increases.

Example

The university allocates lecturers to tutorial classes on the basis that there are 25 students in each tutorial. Each tutorial is allocated a teaching cost of £60 per class per week for the year. Overheads allocated to each class are £40 per class to cover insurance, heating, lighting and maintenance. The cost of one tutorial class is thus £100.

Each year of study comprises of 8 tutorials, one for each module for 30 weeks. The university’s weekly tutorial cost for the 8 classes is thus 8 x £100 = £800. If the university recruits up to 25 students to a programme of study in year 1, then the weekly cost of the tutorials will be £800. The fixed costs of the tutorials will remain at £800 for student numbers that do not exceed 25.

However, once the university recruits another student to a programme of study so that there are 26 students on the programme, an additional tutorial class for each module will have to be provided. As a result, the two tutorials per week for each module will now cost £200 (2 x £100) and the total cost for tutorials for the 8 modules will rise to £1,600 (£200 x 8). £1,600 will be the fixed costs of the tutorials for numbers of between 26 and 50 students recruited to the course.

Again, once a 51st student is recruited to the programme, 3 tutorials for each module will be required, so that the fixed costs will increase to £100 x 3 = £300 for each module and to £2,400 for all 8 modules (£300 x 8). £2,400 will be the fixed costs of the tutorials for numbers between 51 and 75 students recruited to the course.

The fixed costs of tutorials for first year students will thus rise in steps: £800 for the first 1- 25 students, £1,600 for 26 - 50 students, £2,400 for 51- 75 students and rising by £800 for each additional 1-25 students recruited thereafter. The fixed costs remain valid over a fixed range of activity and then rise by another step as additional resources are required to meet additional numbers of students joining the course.