Incremental sales should generate incremental profits

Above a breakeven point, adding customers and/or revenue even at a lower profit margin should result in increased profit to the bottom line. Once your so-called fixed costs are covered, as long as the marginal cost of serving the customer is covered by the sales price, profits should increase. This is a basic tenet of business and sometimes of a marginal or incremental pricing strategy. So what?

This does not seem to work in the public education sector and I can’t figure out why. In truth, it is even worse than that. The California State University system is reducing the number of students it admits this coming fall semester due to budget cuts. I don’t understand the logic. These students are paying full in-state tuition; they are not being marginally priced. How can more students not be at least marginally profitable? Surely the fixed costs of the university system have been covered. Adding more students can’t require more infrastructure. Since they are cutting back, this suggests some infrastructure will be under-utilized. And professors can teach a few more students per class without being paid more … I assume.

I can’t understand any scenario where reducing revenue can help the university. Maybe one of my readers can explain this to me.


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