Impact of FEC on MastersCourses and CPD

This notes summaries the effect of running various course scenarios through a cost model which has for several yearsbeen used to measure the viability of Masters programmes.

A view sometimes expressed is that FEC would make Masters programmes non viable because of the extra cost of academics and administrators compared with a flat rate tax on income. The author wanted to test this presumption and look at various options for running CPD under FEC.

We used threevariants of the model:

  • A modelwhere all income was taxed at a fixed rate of 46% to cover overheads. This called the standard model or SM
  • The same model altered to use FEC
  • An adaption of the FEC model for short courses.

Within these three models we investigated several alternative scenarios most likely to be of interest to programme managers.

Four outputs were selected for particular attention:

  • The minimum number of FTEs necessary for break-evenof Masters on an annual basis.
  • The number of FTEsunits needed to give a cumulative net income of zero for Masters
  • The number of students needed to achieve the same results for CPD.
  • The effective rate of taxation (which is fixed in the standard model but varies with FEC).

The Masters model was run over the first four years of the programme life with year one a development year. The CPD model assumed there was no development period (i.e. the course was given during the first year) and was allowed to run over five years.

The outcomes of these calculations depends on the assumption about costs and also (assuming there is a difference) the balance of foreign and home students put into the model. As far as is possible the numbers that experience over the last few years has shown to be reasonable have been used. However every programme will be different and every programme manager will want to make best uses of his or her own resources to get the best result. The most important assumptions used are listed in appendix 1. The graphs use shortened descriptions of the model used. These are defined in full in the appendix.

The FEC overheads are applied at 100% though lower figures may be chosen with agreement with Heads of School.

1. Masters ; the Effect of FECon the Annual Break-Even point

Figs 1 shows the effect of varying the annual number of FTEson the annual return on gross income where anything greater than 0% means the programme will return moneyfor other uses. Two fee scales are used one has standardfee scales of £3400 for home students and £12500 for foreign students and the second has £12500 for both classes all incremented at 1.25% a year.

The most obvious features are:

The point of zero return is nearly the same whether FEC is used or notbut FEC is more unkind to poorly performing programmes i.e. it imposes a higher of effective tax at low FTEs but is kinder at higher FTEs. This is because the first two years of Masters programmes are normally those of development (which attract high levels of FEC tax) but have low levels of income which attract little tax under the standard model. At higher student entry rates which normally occur later in the programme, the situation is to some extent reversed.

The effect of higher fee levels is to decrease the break even point from an annual 16 FTES to 8 FTEs (see also section 2).

An alternative scenario of using only external lecturers was not consideredprimarily because it is not normally acceptable by the University.Even the use of some external lecturers, while this might theoretically seem to be attractive under FEC because as non university personnel they do not attract FEC overheads is not especially attractive.At the fee rates currently charged by externals (say £1200/day),full University and external salary costs are roughly matched. In-kind provision of a course by say a sponsoringcompany, if that could be achieved, would be an ideal way to reduce FEC overheads.

Fig 2 shows the effective tax rate charged under FEC for our modelwithincreasing annual FTEs the effective level of tax only falls below the 46% used in the traditional model where the annual FTEs exceeds 16 (in practice managers using traditional bottom up models e.g. for CPD have used a whole range of taxes ranging from 40 to 60%). For most programmes the effective tax rate under FEC is significantly higher than the traditionally used fixed tax rate on income.

2. Masters; Cumulative costs in the early years of the programme

While it is clearly desirable to have a programme which breaks even or better within a reasonable period, programme managers must also take into account the cumulative net cash flow. Even though a programme achieves the zero point in terms of real profit in say three years, if the overall cost of the programme is negative because of the development cost then the School has carefully to consider whether for strategic reasons it is willing to bear this cost.

2.1 Masters: culmulative net income, comparison of standard and FEC models

Fig.3 comparesthe cumulative net income for FEC and standard tax models using the standard and foreign fee levels also used in fig. 1. In this graph the X axis is the sum of the FTEs generated over four years (one year development, three years of entry).

It shows first that FEC leads to more negative cumulative income than the standard model for lower numbers of FTEs but the graphs cross for higher numbers where FEC is advantageous.

2.2 Masters; Effect of changing course assumptions on FEC model outputs

Six different programmes designs wereexamined using FEC:

ConditionCumulative Breakeven FTE (3 years)

Standard rate + £200K grant28 (9.2/annum on average)

The standard rate>56 (>19/annum on average)

Standard rate/ academic time cut by half42(14/annum on average)

Equal fees of £8K56 (11.3/annum on average)

Equal fees of £12.5 K42 (14/annum on average)

Equal fees of £16K24 (8/annum on average)

The 200K grant clearlymakes it easier to reach cumulative neutral profit at lower total numbers of FTEs.

At the standard fee ratesor with £8K for home and foreign students the programme reaches positive territory only where cumulative FTEs are around 65 (ca.21per annum)

Minimum fees of around £12000 to £13000 (without a grant) are needed to make programmes cash neutral within a reasonable period.This is either an argument for having only foreign students or raising home fees substantially. The latter option is most attractive where there is a large industrial audience for the Masters course.

Finally the outcomes are, as expected, quite sensitive to the amount of academic time and/or administration time). The average FTE breakeven point drops from more than 19 per annum to 14 to annum if (hypothetically) it were possible to reduce academic time by half. This might be achieved if the taught material was already available or if a different view was taken on the amount of supervision time needed for students.

Reducing administration time has to take into account what are regarded as realistic student/administrative (S/A) ratios. The model either used S/A of about 100 or allowed this to rise to about 150. The authors experience shows that S/A ratios of nearer to 50 may be more practicable.

Fig. 4 looks at the annual rate of return of Masters programmes under various conditions. It shows how only with high fee rates can programmes under FEC expect to break even (0% return) unless they manage to achieve much higher FTEs in the early years than those indicated.

3. CPD; Use of the model for costing CPD under FEC

This section discussesthe profitability of CPD using student numbers as the variable assuming a course fee of around £1000 for a three day course (the model allows three different fee rates to be entered – see appendix 1).

Five alternative models for giving CPD were considered:

By academics with administration time rising as the numbers increased (10% up to 30% of administrators time)

By academics with fixed percentage of administration(10% of administrators time)

By external lecturers with fixed administration (10% of administration time)

With Masters and by academics where administrative costs were born wholly by the Masterscourse

With Mastersbut using external lecturers with administration born wholly by the Masterscourse

3.1 CPD; Annual net income

Fig.5shows the most profitable option (greatest net income) is where the CPD is run as a part of Masters though it matters little if these are external or internal lecturersunless the lectures for the Masters/CPD came free.

The greater the number of students the more profitable the course but course numbers cannot be extended indefinitely both because there is a limit to the size of any CPD audience(30 is probable a reasonable maximum) and also because the CPD students may swamp those doingMasters.

For courses run on their own, about 16 students are needed to make the courses profitable but with Mastersadded in this can be as low as 10 depending on the ways costs are divided.

The option of ‘fixed administration time’ (i.e strictly limiting the percentage of an administrator to the course) means that student to admin ratios are bound to rise as the course gets more successful. This may not be realistic if the course is to be properly run.

3.2 CPD; Effective rate of tax

As before it is possible to measure the effective rate of tax being paid under FEC. This is a useful guide to programme managers who want to use a fixed rate but need a guide (fig. 6)

For CPD run separately from Masters and assuming a reasonable complement of 16 attendees the effective tax rate is about 45%. The other alternatives, which carry the administrative costs with Masters for example, have much lower effective rates of tax because the cost of the academic is almost wholly taken up by the Masters programme.FEC is unkind to small courses, but attractive as the number rise above 16 or so.

3.3. CPD; Cumulative cost of running course

CPD is broadly profitable so such course accumulate cash from year 1. We used the model to imagined a course run in different ways where the numbers rose year on year. Such courses can accumulate up to £60 K over 4 years.Fig 7 illustrates the results.

The least attractive option forseparate CPD where academics have to write the lectures (so incurring high FEC costs) and the most attractive option makes use of external lecturers who write and review their own material.

The best option of all is to run CPD with Masters because the development cost of the CPD (high under FEC) would be zero. Other benefits might accrue if (as in this model)a proportion of the the students were assessed, since experience suggests these students are likely to join the Masters programme later. It is a cheap but effective form of marketing.

The cumulative profits from short courses can be used to offset the cumulative losses from Mastersand one attractive strategy is to run CPD as a precursor to a Masters course and use the profits to develop the Masters course and to gauge the likely demand.

A single CPD course with a cumulative intake of 80 people, run by an external over four years would offset the cumulative losses of a Masters course with 19 students/annum using the standard fee regime of differential home and overseas fees (£3400 and £12500).

Conclusions

1. Overall FEC is unkind to any course with small numbers but the effective rate of tax drops as the numbers rise so large courses including Masters can flourish under FEC provided lecturers and their students can cope with high numbers.

2. Although Masters courses can be made profitable on a year to year basis without a grant they tend to be cumulatively cash negative particularly under FEC.This is because FEC taxes a course from the moment resources are used. If the development time is further extended because of poor planning or unforeseen circumstances then the problem is compounded.

3. Combining Masters with short courses is an attractive scenario because short courses are not so heavily disadvantaged as Masters courses under FEC (they need less academic effort). Use of external lecturers further minimises the FEC overhead. Using CPD early on in the life of a Masters course increases immediate profitability and helps to ensures the course is cumulatively positive over a reasonable period (< 5 years)

4. Pricing is clearly key and unless student numbers are very large,Masterscourses will need to be priced at around £12-13K/FTE(home and foreign) order to break even on an annual basis. A course with standard rates (£3400 home and £12,500 foreign) needs more than 20 FTEs /annum to breakeven but only 9 FTEs /annum at the higher rates. For cumulative breakeven (i.e. over four years)courses also need to be priced £12-13K/FTEwith an average of about 14 students per year. However these figures must be taken as guidelines only because every course is different and the numbers used in these models are only experience based estimates. However these figures must be taken as guidl

5. Cumulative losses should be taken into account by Schools when planning courses.

6. Programme managers need to consider as many scenarios as possible their own costing models to find the right mix for their particular course. Obvious options are to minimise academic and administrative time since these are costly under FEC. On the other hand good courses need effective teaching and administration to succeed and a careful balance has to be struck.

The author welcomes any comments on the figures and thanks Accounts in EPS and members of the BusinessSchool for some useful additional material

The FEC models for both Masters and CPD will be published on the KTA website in addition to the standard tax model already listed.

Dr. S.J.Harris

16.07.2008

Appendix 1

Assumptions made in the model

1.1Mastersbase model

For the base model assumptions were as follows:

FEC calculations used the latest overhead rates available from Faculty. No inflation has been attached to the FEC overhead figures so the overall costs over several years may be understated.

For standard models a rate of 46% tax on income was applied

Masters models consist of one year of development and three years of student entry

Student mix was equal numbers of home and overseas students

Academic input assumed 64 days to write the course

2 days for rewriting (after year 2)

2 days /FTE for setting exams

10days /FTE for supervision

5% of a course director’s time

10% of a programme manager

10% of a marketing person

15% of a technician

30% of a junior administrator’s time rising to 60 % as numbers increased

1.2 CPD base model

CPD is run in the year of taking students

Has a variable fee dependent on whether students are having their unit assessed or whether they are part of a group.

Average charge is £1000 for a three day course

20 days of an academics time to write the course (note that a Masters course is assumed to take 64 days of writing time for 8 units so this may be an overestimate).

2 days for rewriting after year 2

£3600 charge for an external lecturer

10% of a junior administrator’s time rising to 30% as numbers increase (or fixed at 10% in some models)

1