Magazine article University Business

Show Me the Money: A Guide to Profitability in Course Offerings

Magazine article University Business

Show Me the Money: A Guide to Profitability in Course Offerings

Article excerpt

What's an administrator to do? State funding is down, student enrollment is up, economic diversification groups demand courses with limited enrollment that may lose money, and the Board wants the fund balance in the black at year-end.

We suggest that you determine the profitability of all your course offerings. Then you can determine the cost or profit of adding additional courses with specified enrollments. And yes, we've done it; this is not a theoretical treatise. And no, it won't take a high-priced consultant. Let's review a bit of cost volume profit (break-even) analysis. Then we will apply it to our universal college example. Finally, we will present some examples of the knowledge this provides and what to do with it.


Break-even or cost volume profit analysis requires a different way of looking at the revenue/income statement. (This topic is covered in most managerial accounting texts.) Instead of your traditional FASB-mandated system, one needs to think in terms of variable and fixed cost. In short:

Revenue--Variable Costs = Contribution Margin--Fixed Costs = Profit

We will be considering the direct revenue and the direct variable costs associated with teaching courses. Direct revenue consists of:

State Funding + Tuition Revenue + Lab Fees = Direct Revenue

Direct expenses or variable costs consist of:

Faculty Salaries + Adjunct Faculty Salaries + Other Salaries + Opt Exp = Direct Expense

Our result is then:

Direct Revenue--Direct Expense = Contribution Margin

More importantly, contribution margin can be seen as course profit or loss.

Let's touch on the theory of what cost volume profit is all about. When net revenue exceeds variable expense plus fixed expense, the college makes money on the course. When revenue minus variable expense is a positive number, the course offering is making a positive contribution to covering all the rest of the fixed costs of the college. When revenues minus variable expense is a negative number, the course offering must be paid for by other courses; it is not covering fixed costs and must be supplemented elsewhere.


Variable costs in our example here are the only costs associated with teaching courses. The salaries of full-time and adjunct faculty plus direct out-of-pocket course costs, such as classroom fees or lab costs, are variable costs. All other costs are fixed. That's right--in our example, all administrators, staff, rent, utilities, bond interest, etc., are fixed expenses. Those fixed expenses are the ones you cannot do anything about. The variable expenses, however, are controlled by the total course offerings. We gathered our statistics in an Excel spreadsheet as shown in the chart on the next page.

The spreadsheet unfolds in a predictable manner. Enrollment data is analyzed with enrollment, student contact hours (SCH), total contact hours, the number of sections, and finally, by dividing the enrollment per section. Note that the courses do not appear to be in order by enrollment. They are not ... but more on that in a moment. Next, direct revenue is computed as shown. Then the variable costs of faculty plus other salaries plus operating expense plus capital outlay total the direct expense. Note that capital outlay for that particular course offering becomes a variable expense. If that course were not offered, we would not be expending those funds. Hence, an expenditure whose benefit extends beyond one year is still seen as a variable expense in this example. Then we simply subtract total expense from total revenue. Now, what is the logic of the ranking?

We have ranked the courses in order of each overall contribution margin. Why? Because we want to know the total contribution margin or total profit/loss of that course. In our example, it is actually more profitable on a unit basis to teach history than math. …

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