Problem
State University Business School (SUBS) offers several degrees, including Bachelor of Business Administration (BBA). The new dean believes in using cost accounting information to make decisions and is reviewing a staff-developed income statement broken down by the degree offered. The dean is considering closing down the BBA program because the analysis, which follows, shows a loss. Tuition increases are not possible. The dean has asked for your advice. If the BBA degree program is dropped, school administration costs are not expected to change, but direct costs of the program, such as operating costs, building maintenance, and classroom costs, would be saved. There will be no other changes in the operations or costs of other programs.
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STATE UNIVERSITY BUSINESS SCHOOL, BBA DEGREE
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Degree Income Statement
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For the Academic Year Ending June 30
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Revenue
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6,000,000
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Costs
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Advertising-BBA program
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225,000
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Faculty salaries
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3,060,000
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Degree operating costs (part-time staff)
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390,000
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Building maintenance
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555,000
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Classroom costs (building depreciation)
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1,275,000
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Allocated school administration costs
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645,000
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Total costs
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6,150,000
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Net loss
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(150,000
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State University Business School, BBADEGREE
DEGREE INCOME STATEMENT
DIFFERENTIAL REVENUES COSTS
FOR ACADEMIC YEAR ENDING JUNE30
Revenue ____________ _________
Costs ____________ _________
Advertising BBA Program ___________ __________
Faculty Salaries ____________ ___________
Degree Operating Costs ___________ ____________
Building maintenance ___________ ___________
Classroom Costs ____________ ___________
Allocated school administration costs ____________ _____________
TOTAL COSTS _____________ ___________
Net diferenetial _______ (loss or gain?) How much?
Required:
a. Using the worksheet below, determine which revenues and costs are probably differential for the decision to drop the BBA program.
b. What will be the net effect on the SUBS contribution (profit) if the BBA program is dropped?