A coaching centre's special fee offer: relevant cost or revenue trap?
A 40-seat coaching centre in Rohini runs a six-month banking-exam batch. Fixed costs per batch are ₹4,80,000 (rent, faculty, administration). Variable cost is ₹6,000 per student (study material, mock tests). The fee is ₹22,000. Fire-safety rules cap the main room at 30 students. Currently 26 students have paid, and 8 more on the waitlist are likely to enrol. If enrolment exceeds 30, the centre must rent a second room for ₹40,000 and hire an additional tutor for ₹55,000 for the batch. A nearby college offers to send 10 students at a special fee of ₹12,000 each. The offer is confidential and does not affect the ₹22,000 fee paid by existing students. The extra room can hold up to 20 students. The director wants to know whether to accept the college offer, and whether the answer changes if only 3 of the 8 waitlist students actually enrol.
1. Using relevant costs, should the centre accept the college offer if all 8 waitlist students are likely to enrol? Show the calculation.
Read the worked answer
If all 8 waitlist students enrol, direct enrolment is 34, which already exceeds the 30-student cap. The second room (₹40,000) and extra tutor (₹55,000) are therefore committed even without the college offer; they are not incremental to the offer. Incremental revenue from the college = 10 × ₹12,000 = ₹1,20,000. Incremental variable cost = 10 × ₹6,000 = ₹60,000. Incremental contribution = ₹60,000. Fixed costs do not change. Capacity check: the extra room must hold the 4 overflow students plus 10 college students = 14; it holds 20, so it is feasible. Full-batch check: contribution = 34 × ₹16,000 + 10 × ₹6,000 = ₹5,44,000 + ₹60,000 = ₹6,04,000. Fixed costs = ₹4,80,000 + ₹95,000 = ₹5,75,000. Profit = ₹29,000. Without the college offer, the result is a loss of ₹31,000. Conclusion: accept, assuming the 8 waitlist students are firm and no extra variable costs are omitted.
2. What if only 3 waitlist students enrol? Calculate the decision and the break-even fee per college student.
Read the worked answer
With only 3 waitlist students, direct enrolment is 29, which is within the 30-student cap, so no extra room or tutor is needed for direct students. Accepting the 10 college students takes total enrolment to 39, triggering the ₹95,000 extra fixed cost. Incremental result = ₹1,20,000 revenue − ₹60,000 variable cost − ₹95,000 fixed cost = −₹35,000. The break-even fee per college student is (₹95,000 ÷ 10) + ₹6,000 = ₹15,500. At ₹12,000, the offer loses ₹35,000. Reject it, or counter-offer at least ₹15,500, preferably ₹16,000 or more to leave a margin. An exception would be a strategic guarantee of repeat batches that use the spare capacity. Do not accept merely because the ₹12,000 fee exceeds the ₹6,000 variable cost; the extra fixed cost is relevant once capacity is crossed.
3. What non-financial factors should the director weigh before accepting or rejecting the offer?
Read the worked answer
Several non-financial factors matter. First, fee confidentiality: if existing students learn that a college group pays ₹12,000, they may demand matching refunds, eroding the ₹22,000 fee. Second, quality and faculty workload: the extra tutor may be less experienced, and 44 students may dilute attention. Third, payment risk: the college may pay late or withdraw students after the batch starts. Fourth, brand positioning: a low-fee channel may attract future price-sensitive customers but weaken the premium image. Fifth, strategic value: the college could become a recurring source of students, which might justify a short-term loss. Sixth, space and scheduling constraints: the extra room may not be available for the entire batch. The director should quantify the ₹35,000 loss against these factors and negotiate terms, rather than treating the offer as only a contribution-margin calculation.