This paper examines student performance and calculates the theoretical cost of academic failure by Australian undergraduates, using factors implicit in government funding formulae. In order to survive, higher education institutions have had to diversify their funding base and at the same time the government appears now to perceive its contributions as a subsidy to university students, rather than as being an investment in society's broad human infrastructure. The demand for accountability has increased, and output-based funding is much discussed. The ultimate university 'output' is student success, and governments could place a monetary value on this in a very direct way. This paper takes a methodological approach in analysing the cost of failure.