The Eastern University Business School teaches someundergraduate business courses for students in the EasternUniversity College of Arts and Science (CAS). The 6,000undergraduates generate 2,000 undergraduate student courseenrollments in business courses per year. The B-school and CAS aretreated as profit centers in that their budgets contain studenttuition revenues as well as costs. The deans have discretion to settuition and salaries and determine hiring as long as they operatewith no deficit (revenues = expenses). Undergraduate tuition is$12,000 per year and each student takes eight courses per year.Average undergraduate financial aid amounts to 20% of grosstuition. The current transfer price rule is gross tuition percourse less average financial aid.
This transfer price rule gives net tuition to the B-school as arevenue and deducts an equal amount from the CAS budget. The CASdean argues that the current system is grossly unfair. CAS mustprovide costly services for undergraduates to maintain a top-ratedundergraduate program. For example, career counseling, academicadvising, sports programs, and the admissions office are costs thatmust be incurred if undergraduates are to enroll at Eastern.Therefore, the CAS dean argues, the average cost of these servicesper undergraduate student course enrollment should be deducted fromthe tuition transfer price. These undergraduate student servicestotal $9.6 million per year.
Required:
a. Calculate the current revenue the B-school is receiving from undergraduate business courses. What will it be if the CAS dean'sproposal is adopted?