This further example will help you to appreciate how increasing income per unit of input resource leads to higher profits and continues the topic from pages 336-337 (Sales and profit per unit of input resource)of Chapter 8.

Example

In your university tutorial class, there are 15 students. The tutorial room has a capacity of 30 students. Your tutor is paid a fixed rate of £50 per hour to teach your class. The rental cost of the tutorial room is fixed at £30 per hour and the electricity for lighting and for overhead presentations costs £1.50 for the hour. The university allocates £10 income per student per tutorial hour to each class in which they are enrolled. How much profit is your tutorial class currently making and how much could the tutorial make in total if the number of students were to increase?

Current profit on the tutorial class of 15 students:

Potential maximum profit on the tutorial class of 30 students:

The profit on the tutorial class has risen by £218.50 – £68.50 = £150.00. £150 represents all the additional income from fitting a further 15 students into the classroom. There are no additional costs incurred in teaching the extra 15 students as the tutor’s £50 is a fixed rate for teaching 1 or 30 students, the rental cost of the room is fixed at £30 for each hour of teaching no matter how many or how few students there are in the room and no more electricity will be consumed in lighting the room or in making the overhead presentations. Therefore, all the additional income is pure profit as the costs of the class have already been fully covered by income from the original class of 15 students.

In this way, the university is able to generate higher profits from the same input resources without having to allocate any more input resources to the one hour class. Income per unit of input resource has been increased and higher profits are the result.

Page reference: 334-335, 336-337

Heading reference: Revenue and profit per employee, Sales and profit per unit of input resource