The variety of options for reading within the Theory and Practices of Online Learning text was exciting as I have a specific interest in the finances of education and the chapter on Making Relevant Financial Decisions jumped out at me. I hadn't previously thought about the fact that even in finance, issues and options can be looked at in completely different ways that can completely change an opinion or decision. The ideas of allocated and sunk costs were important in all of the different options, and it reminded me strongly of my office at JBLM. The office, furniture, and general supplies were a sunk cost, and the staff salaries are allocated fixed costs, so running a few classes with less then the desired number of students, even if that means technically running at a loss is still going to help offset the cost of the salaries and of the initial office set up.
I can definitely see how someone with a less then optimal financial background, when placed into the decision making roll can end up going the wrong way with things like cost cutting and project elimination due to overrun. There was a specific example about buying a new copier even if your old one was only a day old because the long term cost savings on the new one made it a good financial decision. One thing that I didn't really agree with in the example was that the cost of the first copier was irrelevant as it was a sunk cost. Yes the cash was gone, but that doesn't mean it doesn't matter if you spend more money immediately on a new one. In cold financial logic, it makes sense to save the money long term, but in the short term trying to justify the outlay of even more funding right after an already large purchase would be difficult to do. Savings over 5 years is a hard bonus for me to swallow when looking at a short term or yearly budget that has already been stretched to the maximum.
Also, the reading made me want a new copier in my office.
I feel like we could always use a new copier. However, sometimes the devil that you know is better than the unknown.
ReplyDeleteTravis, this is a really interesting topic! Thank you for your explanations of "sunk" verses "allocated fixed" costs. I must admit, the example of the copier went a little over my head. I think that I would have understood the example more if dollar amounts were discussed. This new copier, is it a better model? Does it e-mail and fax, where as the day old copier only made copies? Or are they literally the same model and dollar amount? (I get similarly confused how cars depreciate in value once you drive them off the lot. That makes no sense to me.)
Your first example of how running a class at low enrollment is preferable than no class, because it helps balance out the initial cost of the furniture and instructor salaries, is also fascinating. In layman's terms, is this equivalent to saying that holding the small class is helping you "get your money's worth" out of the costs you've sunk or allocated to running the institution?
You're exactly right on "get your money's worth". If you're already paying the professor, the staff and for the classroom/material, then running a class with 3 students is still better then not running it at all because you at least get the tuition for those students.
ReplyDeleteAs for the copier example, it was more or less this: I bought a $20,000 copier yesterday. Then today I find out that there is a $25,000 copier that will actually save me $0.05 per sheet I print over the $20,000 copier and after 5 years, I actually will have saved enough to cover the cost of basically just tossing the one I already bought. Technically the financial planning part of me is supposed to go out and buy the new $25,000 copier even though the one I have is perfectly good because in the end it will save me more money. The key is that the savings basically has to cover both the cost of the new printer and the loss of the old, so its not going to be workable in most situations I'd think.