Renuka Kumar OMDE 606 March 8, 2014 Assignment 2 Please note: 1.

I have used a group size of 25 students per tutor. 2. I have annualized over 4 years.

1. Fixed costs - costs that are not affected or influenced by output but remain constant. Examples would be the cost of classrooms or managing director. Variable costs - costs which vary with the volume of output or activities. In DE these would be costs that vary with the number of students. Capital costs - costs that relate to items which have a value over more than one financial period such as buildings or computers. Operating costs, on the other hand, provide a benefit only during the current financial year. These costs may be recurrent or non-recurrent. Recurrent costs will occur in one year and is expected to be incurred in another year or the years after, for example, salaries. Fixed recurrent: All cost items under A - $41,100 Management (ongoing) Secretarial support (ongoing) Fixed capital: All cost items under B and C - $143,750 Management & secretarial support (development) Development of study guide & preparation of a reader Editing and design & copyright Development of DVDs & DVD instructional design DVD production & copyright Development of assignments Maintenance cost of author, editing & design and copyright Variable (non-recurrent): All cost items under D - $403/student Marking of assignments, tutor, Production - of study guides, assignments, the reader, and DVD. Packaging and postage.

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2. The Recurrent Fixed Costs are $41,100. 3. Fixed Costs of Development (FD)
Fixed Cost of Maintenance (FM) Total Fixed Costs (F) = FD + FM 132,500 11,250 $143,750

4. Variable cost per student (V) = $403 5. Simple depreciation divides the costs by the number of years during which the item is to be
used. FD (depreciated over 8 years) = FD/8 = $132,500/8 years = $16,563 a year FM (depreciated over 4 years) = FM/4 = $11,250/4 years = $2,813 a year

6. Annualization not only depreciates capital costs but also factors in opportunity cost.
FD annualized (depreciated over 8 years at 6.2%) = $21,506 a year FM annualized (depreciated over 4 years at 6.2%) = $3,262 a year

7. Annualization addresses the issue of opportunity cost. Capital costs are not just depreciated
but interest lost on your initial investment is taken into account. If the capital could be used in other ways then it would be more appropriate to figure in the loss of potential interest and annualize the depreciation value. However, this opportunity cost should only be taken into account if there is a real option to invest money where interest can be earned. If the capital could not have been used for anything else, then there is no loss of potential interest and simple depreciation would be appropriate.

8. TC = F +V x N
TC = $513,896 + $403*1440 TC = $1,094,216

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9.
1,200,000 1,000,000
Total costs

Costs and income

1,094,216

800,000 600,000 400,000 200,000 180 360 540 720 900 No students
TC=F+VxN

$$

586,436

1,080

1,260

1,440

10. AC = F / N + V = $513,896 / 1440 + 403

AC = $760

11.
3,500 3,258 3,000
Average costs per student

2,500 Average costs per student

2,000

1,830

1,500

1,355 1,117 974

Variable cost per student

1,000

879

811

760

500

180 360 540 720 900 No students 1,080 1,260 1,440

Aggregate unit costs

AC=F/N+V

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12. Breakeven point (BP) = F / (SF -V)

BP = $513896 / (1140 - 403) BP = $697

13.
1,800,000 1,600,000
Income

Costs and income

1,400,000 1,200,000 1,000,000 800,000 600,000 400,000 200,000 180 360 540 720 900 1,080 1,260 1,440 No students
TC=F+VxN Income
Break even point - 697 Total costs

14. Rumble (1997) states that as a general rule fixed costs for DE are higher as compared to
traditional education but the variable costs per student of DE are lower. As a result as more students are enrolled in the DE program the average cost per student falls and economies of scale are achieved. The AC equation graph shows that most significant economies of scale occur at the beginning of the program and then tapers off. The brick and mortar institutions cost structure is different to that of DE. In DE there are higher costs at the initial start up for course development. However, these higher fixed costs are generally spread across many learners. Traditional institutions, on the other hand, may have lower start up costs compared to DE but have higher maintenance costs for maintaining their buildings and staff. The variable costs in DE are lower due to these programs relying more on tutors and adjunct faculty as compared to the full time and tenured staffing requirements of the traditional universities. Because of a lack of physical constraints, such as classrooms, DE courses can have more students. This increases the N in the AC and TC equations and allows for more economies of scale. Rumble, G. (1997). The costs and economics of open and distance learning. London: Kogan Page.
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