CASE 5

1.

Yes. All organizations should set goals. A large-scale project such as a professional rodeo may not make a profit in the first year. Based on ticket sales, the Auburn Circular Club Pro Rodeo Roundup appears to be a popular attraction. Therefore, if the club uses management accounting techniques successfully to plan, control, and monitor activities, the project should produce a profit in the future. Civic organizations often give back to the community in a variety of ways, such as providing scholarships, making donations to worthy causes, and volunteering. Auburn Circular Club wants to give back to the community by providing entertainment to the public through an enjoyable three-day family event. Funds raised by the rodeo will then be filtered back into the community via traditional channels. By sponsoring the rodeo, Auburn Circular Club gains exposure through public radio announcements, fliers, and advertising posters throughout the community. Patrons will look forward to next years entertainment, will tell others, and ticket sales will increase. Patrons may also seek to join such a civic-minded organization and support future fund-raising efforts sponsored by the club.

2.

Like profit-seeking organizations, nonprofit organizations should make sure an activity is worth the required investment of time, effort, and monetary resources. Jonathans comment implies that the rodeo is expected to fulfill the organizations goals and objectives. Yes. Jonathan views this project as a capital investment for the organizationnot the purchase of tangible, long-term assetsbut a project that will have a positive impact on the organization over a long term. In other words, even though the rodeo reported a loss in its first year, Jonathan appears to believe the rodeo will be profitable in the future and that the community is well served by the club providing a high-quality, family-oriented event.

3.

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Weygandt, Managerial Accounting, 5/e, Solutions Manual

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Case 5-1

CASE 5 (Continued) 4. Within a relevant range, most of these costs are fixed costs. In other words, variable costs would be a very small percentage of the costs in any of these categories. The high and low levels of activity are 96 contestants Saturday night and 68 contestants on Friday. The catering costs at these two levels are $1,243 and $998 respectively. The difference in catering cost is $245 or ($1,243 $998). The difference in contestants is 28 or (96 68). Therefore, the variable cost for catering is $8.75 per contestant ($245 28). The fixed cost is determined by subtracting the variable cost at either level from the total cost at the corresponding level as follows: Activity Level High Low $ 998 $1,243 840 $ 403 595 $ 403

5.

Total cost Less: Variable costs 96 contestants X $8.75 68 contestants X $8.75 Total fixed costs 6. Some suggestions include:

Promote ticket sales for the Friday and Sunday shows. Consider renting additional bleachers. Include additional entertainment such as a rock or country music star to attract individuals who did not attend the first annual event. Increase revenue by having members of Auburn Circular Club provide concessions to the public instead of outsourcing concessions to a local youth organization. Increase revenue by raising ticket prices. Include group rates to businesses and organizations. Decrease costs by bartering with a local hotel for free accommodations for stock contractors in exchange for a free sponsorship.

Case 5-2

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Weygandt, Managerial Accounting, 5/e, Solutions Manual

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CASE 5 (Continued) Decrease costs by exchanging free tickets with a local farmer for hay. Negotiate with a local insurance agent for a lower rate. 7. To determine the break-even point in dollars, we need to determine fixed costs and the contribution margin ratio. Fixed costs are estimated to be $51,000 and variable costs at 4% of total revenue. The contribution margin ratio is therefore 96%. The formula to compute the break-even point in dollars is therefore as follows: Fixed costs Break-even point = = $51,000 = $53,125 in dollars Contribution margin ratio 0.96 We then subtract from the break-even point in dollars the contribution from sponsors to determine a break-even point in dollars from ticket sales. Break-even point in dollars................................................................. Less: Contributions from sponsors ............................................... Amount needed from ticket sales to break even......................... 8. $53,125 25,600 $27,525

(a) To determine the dollar volume of ticket sales needed in order to earn a target profit of $6,000, we use the following formula: Fixed costs + Target profit = $51,000 + $6,000 = $59,375 Contribution margin ratio 0.96 We then subtract contributions from sponsors to arrive at the required ticket sales in dollars. Amount needed to earn $6,000............................................... Less: Contributions from sponsors .................................... Amount needed from ticket sales.......................................... $59,375 25,600 $33,775

(b) We follow the same procedure as in (a), using the same formula: Fixed costs + Target profit = $51,000 + $12,000 = $65,625 Contribution margin ratio 0.96

Copyright 2010 John Wiley & Sons, Inc.

Weygandt, Managerial Accounting, 5/e, Solutions Manual

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Case 5-3

CASE 5 (Continued) We then subtract contributions from sponsors to arrive at the required ticket sales in dollars. Amount needed to earn $12,000 ........................................... Less: Contributions from sponsors................................... Amount needed from ticket sales ........................................ 9. $65,625 25,600 $40,025

At a target profit of $6,000, the rodeo will need to generate $59,375 in total receipts. Of these total receipts, $25,600 are expected to be contributions from sponsors. The receipts from ticket sales are computed as follows: Amount needed to earn $6,000 .................................................... Less: Contributions from sponsors.......................................... Ticket revenues................................................................................. $59,375 25,600 $33,775

We then compute the average cost per ticket using first-year data as follows: Average cost per ticket = *1,663 + 898 + 769 Given an average price of $8.70, it will take 3,882 tickets over the three days or 1,294 tickets per day as shown below. Ticket revenues = $33,775 = 3,882 for three days or 1,294 per day Average cost per ticket $8.70 Since the stands were able to hold the Saturday night audience of 1,663, the facilities appear adequate. Ticket revenue = $28,971 = $8.70 Number in attendance 3,330*

Case 5-4

Copyright 2010 John Wiley & Sons, Inc.

Weygandt, Managerial Accounting, 5/e, Solutions Manual

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CASE 5 (Continued) 10. Receipts Contributions from sponsors ............................ Receipts from ticket sales (from 8.)................. Total cash receipts ................................................ Expenses Livestock contractor............................................. Prize money ............................................................. Sponsor signs for arena (1,900 X $1.164*) .... Insurance .................................................................. Ticket printing ($1,050 X .50).............................. Sanctioning fees .................................................... Entertainment.......................................................... Judging fees ............................................................ Rent ............................................................................ Utilities....................................................................... Sand for arena......................................................... Miscellaneous fixed costs................................... Total expenses........................................................ Net income ............................................................... *$25,600 22,000 11. The costs associated with Shelleys rodeo apparel are not relevant costs. First, even if these were costs incurred by the rodeo, they would be considered sunk costs, which are never relevant. Second, they are personal costs of Shelley and not relevant to the rodeo. You should encourage the committee to accept the offer of the tent and Shadys Bar-B-Q catering. Because there is room for additional banners in the arena, the only relevant costs to consider here are the potential savings of $3,341 for contestant hospitality and the cost of the two banners totaling $96. Even if there was no space in the arena for additional banners, the Committee should consider accepting the tent and the Bar-B-Q meal offered by Shadys and consider eliminating other sponsors. A better alternative, however, would be to extend the arena in order to add more signs or provide another way to advertise sponsors. For example, include them in radio and television advertising. The cost is an opportunity cost; i.e., the foregone benefit ($3,341 cost savings) that would be lost from not accepting Shadys and the Fun Shops offers.
Weygandt, Managerial Accounting, 5/e, Solutions Manual (For Instructor Use Only)

$25,600 40,025 $65,625 $26,000 21,000 2,212 600 525 925 859 750 600 300 300 100 54,171 $11,454

12.

Copyright 2010 John Wiley & Sons, Inc.

Case 5-5