Alexander Hamilton University Alexander Hamilton University (AHU) is a small university located in Charlestown, Saint Kitts and Nevis. The university is very focused, with only two schools: The School of Business (SB) and the School of Engineering (SE). Both schools offer traditional undergraduate and graduate degrees as well as certificates and executive credentials. Given the wide array of programs and students, the delivery of content is multifaceted; faculty use a combination of in-person (in the "room where it happened"), asynchronous online and synchronous online delivery methods. Similarly, faculty are expected to maintain an active research portfolio; many faculty use engineering labs, market simulation labs, and observation labs (e.g., for focus groups) to collect data and run experiments. In addition to the resources located specifically within the SB and SE, the university offers centralized support through a shared services model. AHU now centralizes support for general administration (e.g., admissions, advising, and IT), research (via research pods) and instructional design (for online and in-person course development). Students at AHU aim to customize their programs to best meet their goals. Allowing students a variety of options - including the opportunity to work in labs and help with research - is crucial to the recruiting and retention of students at AHU. In general, the SB students are more interested in experiential learning, internships, and a mix of teaching methodologies. The SE students expect hands-on lab experience and research opportunities. In 2020, tuition per student (for either SB or SE) which is largely determined by market force is $60,000. Existing Cost System at AHU The existing cost system at AHU calculates the cost per student in both the School of Business (SB) and the School of Engineering (SE). Costs at each school consist of direct labor and direct facility costs as well as allocated overhead costs. Direct labor and facility costs are variable costs with respect to enrollment. The existing cost system at AHU treats all overhead, except for instructional design, the same. The instructional design costs are estimated to vary in relation to the number of courses. All other overhead costs (i.e., administrative overhead and research pod overhead) are allocated to SB and SE based on student enrollment. The budgeted operating income statement for 2020 is provided in Ex. 1. New Cost Study at AHU Angelica Schuyler, President of AHU, authorized an internal cost study to better assess individual schools' profitability. The findings reveal the following: 1 1. Administrative costs are comprised of Admissions, Advising, Alumni Relations and IT costs. The study reveals that these costs are best proxied by student enrollment. 2. Research pods provide support for faculty research. These expenses include the costs of research assistants, supplies, databases, and lab equipment, for example. The costs in this pool are primarily driven by the cost of running laboratories; the other expenses are minimal in comparison. Larger labs in terms of square footage equate to larger costs of running the research pods. 3. Instructional design includes the costs associated with the instructional designer, professional filming and editing, and the cost of the online platform. The administration previously treated all online classes the same. However, the new cost study revealed that online courses vary significantly in their sophistication and development time. The resources used to develop new courses, and update existing courses, seemed to relate to the time spent developing courses. 4. Direct labor (mostly faculty compensation) and facility costs (mostly classroom venue rental cost) are variable costs varying with the enrollment." 5. 100% of administrative costs, 30% of research pods and 80% of the instructional design costs are fixed. Ex. 2 contains some of the operating data projected for 2020. Recent development The year 2020 turned out to be a tough year for AHU. COVID-19 hit in March, and everything came to a halt. With the uncertainty and fear related to the virus, enrollments were adversely affected. Students questioned whether school would be "normal," and international students struggled with the decision to move to an unfamiliar country. Graduate enrollment increased slightly and undergraduate enrollment declined. The actual 2020 enrollment was 250 for SB and 300 for SE. Unlike most of its competitors, AHU's philosophy emphasizes personalized attention to students: many classes at AHU take the format of an independent study where a faculty member interacts with an individual student or a very small group of students. Exhibit 3 contains actual and budgeted direct labor information for 2020. Aaron Burr College, a local liberal arts college, was not prepared for the move online that was sparked by COVID-19; it did not have the infrastructure to support the online delivery of content. The college's administration approached AHU's IT team to purchase and operate a new server. The server in question can be used for only one year, has a price tag of $1,750,000 and can handle a maximum of 7,500 usage hours in the year. The variable cost of operating the server is $60 per usage hour, and Aaron Burr College plans to use 4,000 usage hours in the next year. Although allowing Aaron Burr College to use AHU's IT services would not affect AHU's competitive edge, Schuyler was struggling to calculate a fair price for this relationship. AHU is in the process of making a budget for 2021. Exhibit 4 contains assumptions that is using to forecast 2021's results. Exhibit 1: 2020 Budgeted Operating Income Statement Revenues Costs 36,000,000 Direct Labor Direct Facility 4,000,000 2,000,000 Administrative 4,500,000 Research pods 10,000,000 Instructional design 12,000,000 Operating Profit 3,500,000 Exhibit 2: Projected Operating Data for 2020 Number of courses SB SE 50 150 Research lab square footage 300,000 100,000 Enrollment 200 400 # of hours spent developing courses 200,000 50,000 Exhibit 3: Budgeted and Actual Direct Labor Usage in 2020 Budgeted Actual Hourly Hourly Wage DL Dollars Wage DL Dollars SB 750 2,250,000 800 4,000,000 SE 150 750,000 200 600,000 Total 4,000,000 4,600,000 Exhibit 4: 2021 Budget Assumptions Revenues Total enrollment 40,000,000 750 5,000,000 Total direct labor cost Number of courses Total research lab square footage Total # of hours spent developing courses 250 350,000 200,000