Question

From historical data, you discover that the national average construction cost of middle schools is $10,500 per student (city index 100). If the city index for Oklahoma City is 76.9 and for Los Angeles it is 108.5, estimate the total construction cost for a middle school of 800 students in each city.

Answer 1

We will use cost index model to calculate it. We assume here the cost structure of two places are cost in place B that we need to calculate cost in place A and it will be given. Formula for cost index model is

(Cost per unit in place B/Cost per unit in place A) = (Index value at place B/ Index value at place A) = (Cost per unit in place B/ $10,500) = 76.9/100. Therefore cost per unit i.e cost per student in Oklahoma is 10500*0.769 = $8074.5, Therefore for 800 students total construction cost in Oklahoma is $8074.5*800 = $64,59,600.

Similarly we can calculate the cost of construction per student in Los Angeles is $10,500*108.5/100 = 10500*1.085 = $11392.5. So total cost of construction for 800 students is $11392.5*800 = $9,114,000