Homework Question

Question

The state government has contacted HFA for an additional ten new trainee spots, which would expand the current career training program to a total of sixty trainees. The average cost of the program is approximately $6,000 per trainee at the current level of service; however, the state is willing to pay $3,000 each for the ten extra spots, keeping the reimbursement rate for the fifty existing seats unchanged. The facility has the capacity for one hundred students and the number of existing teachers can handle sixty students. Should the HFA accept this offer from the state?

Answer 1

To assess whether HFA should accept the state's offer, let's break down the financial implications.

Current Scenario:

1. Existing trainees: 50
2. Cost per trainee: $6,000
3. Total cost for existing program: 50×6,000=300,000
4. State reimbursement per trainee: $6,000
5. Total reimbursement for 50 trainees: 50×6,000=300,000
6. Net financial position: Break-even (no profit or loss).

Proposed Expansion:

1. Additional trainees: 10
2. Cost per additional trainee: $6,000
3. State reimbursement for additional trainees: $3,000 each
4. Total cost for 10 additional trainees: 10×6,000=60,000
5. Total reimbursement for 10 additional trainees: 10×3,000=30,000
6. Net loss for 10 additional trainees: 60,000−30,000=30,000

Overall Outcome:

1. Net loss from the expansion: $30,000
2. Capacity: The facility can handle up to 100 students, and the current staff can manage 60 students, meaning there is no need to hire more teachers for this expansion, which saves costs related to staffing.

Decision:

While the facility can accommodate the additional trainees without expanding staff, HFA would incur a $30,000 loss by accepting the state's offer due to the reduced reimbursement rate for the extra trainees.

Recommendation: Unless HFA has other motivations (e.g., long-term partnership with the state or future opportunities for higher reimbursement), it would not be financially advisable to accept the offer at the current rates, as it would result in a net loss. HFA should consider negotiating for a higher reimbursement rate for the additional trainees to avoid incurring a loss.