Question

The director of a nonprofit foundation that sponsors 8-week summer institutes for graduate students analyzed the costs and expected revenues for the next summer institute and recommended that the session be canceled. In her analysis she included a share of the foundation’s overhead – the salaries of the director and staff and costs of maintaining the office – to the program. She estimated costs and revenues as
follows:
Projected revenues (from tuition and fees) $300,000
Projected costs
Overhead $50,000
Room and board for students $100,000
Costs for faculty and miscellaneous $175,000
Total costs $325,000


What was the error in the director’s recommendation?

Answer 1

The error in the director's recommendation lies in not considering the full economic picture. The projected revenues from tuition and fees ($300,000) cover the direct costs of the program but do not cover the allocated overhead costs ($50,000) included in the analysis. Therefore, the director may have recommended canceling the session based on a comparison of direct costs and projected revenues, overlooking the share of overhead costs that should be covered by the program.