Purpose Of Assignment: The Case Study Focuses On Break-Even

Purpose Of Assignmentthe Case Study Focuses On Break Even Margin Of S

The case study focuses on break-even, margin of safety, and incremental analysis and allows students to experience working through a business scenario to apply these tools in managerial decision making. Students are required to make decisions and provide solutions based on their evaluation of financial data.

Paper For Above instruction

The purpose of this case study is to engage students with practical applications of financial analysis, including break-even points, margin of safety, and incremental analysis, within a real-world context involving a nonprofit organization's effort to host a professional rodeo as an annual fundraising event. The scenario provides a comprehensive context for understanding how managerial decisions impact financial outcomes, strategic planning, and sustainability of the event.

The Circular Club of Auburn, Kansas, under the leadership of Shelley Jones, aims to establish a sustainable annual rodeo event. Shelley envisions the rodeo not only as a fundraiser but also as a community-building activity that enhances the club’s presence and benefits the local community. To evaluate its financial viability and strategic direction, the club must analyze costs, revenues, and investment returns associated with organizing the rodeo fundraiser.

Initial analysis of the first-year rodeo indicates a net loss of $8,326, suggesting that the event was not profitable based solely on the immediate financial outcomes. However, CPA and club President Jonathan Edmunds views this loss as an investment, implying that the rodeo provides long-term benefits that outweigh short-term losses. This perspective aligns with the broader strategic goal of establishing the rodeo as an annual event that grows in popularity and profitability over time.

Jonathan’s statement highlights the importance of understanding the difference between an accounting loss and an investment. An investment in this context refers to the expenditure of resources—such as time, effort, and money—anticipated to generate future benefits, including increased community engagement, brand recognition, and higher revenues in subsequent years. This perspective emphasizes that initial losses can be acceptable if they lay the groundwork for future growth and sustainability.

The analysis of whether Jonathan’s viewpoint is consistent with Shelley’s strategic goals reveals nuances. Shelley advocates for continuous improvement, community contribution, and establishing a recurring event that gains prominence each year. While the first-year loss suggests the event was not yet profitable, the investment mindset supports the idea of building future success through strategic expenditure and incremental growth. Therefore, her vision aligns with the concept of viewing the rodeo as a long-term investment—an essential foundation for achieving her goals of growth, community involvement, and fundraising success.

Planning for future rodeos involves strategic cost management and revenue enhancement. Shelley, Jonathan, and Adrian Stein, the Fundraising Chair, consider cost reductions and increased sponsorship revenues as essential. Jonathan estimates fixed costs can be reduced to approximately $51,000 and that variable costs could be about 4% of gross receipts. Adrians projects sponsorship revenue to increase to $25,600, reflecting increased community and business engagement in the event.

Considering these revised assumptions, the club’s financial planning must include calculating the break-even point in dollar sales to ensure the event can be profitable and sustainable. The break-even analysis involves identifying total fixed costs, variable costs per dollar of sales, and total revenue needed to cover costs. Using the projected fixed costs of $51,000, variable costs at 4%, and projected sponsorship income, the club can determine the minimum ticket sales required to reach break-even and to attain target profits such as $6,000 and $12,000.

Calculations for the break-even point indicate that the formula is:

Break-even sales in dollars = Fixed costs / (1 - Variable cost rate)

Where fixed costs are estimated at $51,000 and variable costs are 4% of total gross receipts. Plugging these into the formula yields:

Break-even sales = $51,000 / (1 - 0.04) = $51,000 / 0.96 ≈ $53,125

This means the club must generate approximately $53,125 in ticket sales to cover all fixed and variable costs, assuming sponsorship revenue and other income are consistent with projections.

To achieve a target profit of $6,000, the sales in dollars needed are calculated as:

Required sales = (Fixed costs + Target profit) / (1 - Variable cost rate)

Applying the numbers:

Required sales = ($51,000 + $6,000) / 0.96 ≈ $57,000 / 0.96 ≈ $59,375

Similarly, for a target profit of $12,000:

Required sales = ($51,000 + $12,000) / 0.96 ≈ $63,000 / 0.96 ≈ $65,625

The adequacy of facilities at the fairgrounds depends on the attendance needed to generate these ticket revenues. Given the previous attendance figures, the facilities can handle audiences of approximately 2,500 patrons per night. To generate the necessary revenue for the $6,000 profit goal, for example, with ticket prices at $8 in advance, the club would need to sell about 7,422 tickets, which exceeds the previous attendance. Therefore, unless ticket prices or attendance are increased significantly, the current facilities may not support the attendee volume required to meet the revenue targets.

Regarding Shelley’s expenses related to her rodeo clothing, these costs are generally considered personal and not directly linked to the event's operational costs or revenue generation. Since these expenses do not impact the financial outcomes of the rodeo itself—they are personal discretionary expenses—they are not relevant costs for the purpose of financial analysis of the event’s profitability. Including personal expenses that do not influence the event’s financials would distort analyses and decision-making processes.

The decision to replace the catering service with donations from local businesses involves analyzing costs, sponsor benefits, and the potential impact on revenues. The cost of signs for the contestant hospitality tent is estimated at $48 each, with room for additional signs if available. If the arena’s capacity for signs is limited, the club must consider whether the promotional benefit outweighs the cost, especially if display space is constrained. If additional signage space is available, the club may opt to maximize sponsorship exposure without significant incremental costs, as additional signs typically have minimal marginal costs beyond initial setup and design.

Furthermore, the club should consider non-financial costs such as the reputational value of sponsorship, community goodwill, and the potential for increased future sponsorships. If space limitations restrict signage, the opportunity cost of not displaying additional signs must be weighed against the sponsorship revenue they could generate.

As the incoming chair of the rodeo committee, several strategic steps are essential to ensure the event’s profitability:

• Conduct detailed variable and fixed cost analyses to identify areas for potential savings.
• Increase sponsorship revenue through targeted outreach, emphasizing the visibility and community impact of sponsors.
• Optimize ticket pricing strategies to balance attendance and revenue, possibly introducing tiered pricing or group discounts.
• Enhance marketing efforts to boost attendance, including social media campaigns and community engagement events.
• Improve operational efficiencies, such as gate control and crowd management, to maximize attendance and revenue.
• Leverage local partnerships to reduce costs, including negotiating discounts for services and supplies.
• Implement a comprehensive financial tracking system to monitor expenses and revenue continuously.
• Plan for contingencies to manage unforeseen expenses or attendance shortfalls.
• Solicit feedback from attendees and sponsors post-event for continuous improvement.

In summary, this case study emphasizes the importance of strategic financial planning, cost control, and stakeholder engagement in organizing a successful and sustainable fundraising rodeo. Proper analysis and decision-making, guided by principles of managerial accounting, can transform initial losses into long-term investment mentalities that help the Circular Club meet its strategic goals.

References

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