Jordan University teaches a large range of undergraduate courses. It is interest

Question

Jordan University teaches a large range of undergraduate courses. It is interested in determining the cost equation for the facilities cost as a function of student credit hours so that it an more accurately budget its facilities costs as enrollment grows. Information for the high and low cost semesters and volumes for last 5 years appears below

Semester

Student Credit Hours

Facilities Cost

Spring 2007

250,000

$500,000

Fall 2004

300,000

$530,000

Using the high low method, with student credit hours as the activity driver, what is the equation for facilities cost (FC) as a function of student credit hours?

A)

FC = $350,000 + $0.60 / student credit hour

B)

FC = -$585,100 + $1.67 / student credit hour

C)

FC = $1.77 / student credit hour

D)

FC = $2 / student credit hour

Semester

Student Credit Hours

Facilities Cost

Spring 2007

250,000

$500,000

Fall 2004

300,000

$530,000

Explanation / Answer

Hi,

Please find the answer as follows:

Variable Facilities Cost = (Total Cost for Fall 2004 - Total Cost for Spring 2007)/(Student Credit Hours for Fall 2004 - Student Credit Hours for Spring 2007) = (530000 - 500000)/(300000 - 250000) = $.6 per hour

Fixed Cost = Total Cost - Total Variable Cost = 530000 - 300000*.6 = 350000

Equation:

FC = 350000 + .60/student credit hour

Option A is the correct answer.

Thanks.

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