Prepare a CVP (Cost-Volume-Profit) income statement for current operations and after Mary’s changes are introduced.

CVP (Cost-Volume-Profit)

Purpose of Assignment

The Case Study focuses on CVP (Cost-Volume-Profit), break-even, and  margin of safety analyses which allows students to experience working  through a business scenario and applying these tools in managerial  decision making.

Assignment Steps

Resources: Generally Accepted Accounting Principles (GAAP), U.S. Securities and Exchange Commission (SEC)

Tutorial help on Excel® and Word functions can be found on the Microsoft® Office website. There are also additional tutorials via the web offering support for Office products.

Scenario: Mary Willis is the advertising manager for  Bargain Shoe Store. She is currently working on a major promotional  campaign. Her ideas include the installation of a new lighting system  and increased display space that will add $24,000 in fixed costs to the  $270,000 in fixed costs currently spent. In addition, Mary is proposing a  5% price decrease ($40 to $38) will produce a 20% increase in sales  volume (20,000 to 24,000). Variable costs will remain at $24 per pair of  shoes. Management is impressed with Mary’s ideas but concerned about  the effects these changes will have on the break-even point and the  margin of safety.

Complete the following:

  • Compute the current break-even point in units, and compare it to the break-even point in units if Mary’s ideas are used.
  • Compute the margin of safety ratio for current operations and after  Mary’s changes are introduced (Round to nearest full percent).
  • Prepare a CVP (Cost-Volume-Profit) income statement for current operations and after Mary’s changes are introduced.

Prepare a maximum 700-word informal memo to management addressing Mary’s suggested changes.

  • Explain whether Mary’s changes should be adopted. Why or why not?  Analyze the above information (three bullet points above) and use this  information to support your suggestion.

Show your work in Microsoft® Word or Excel®.

Complete calculations/computations using Microsoft® Word or Excel®.

Format your assignment consistent with APA guidelines.

Second part:  Cost Behavior Analysis

Purpose of Assignment

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.

Assignment Steps

Resources:  Generally Accepted Accounting Principles (GAAP), U.S. Securities and Exchange Committee (SEC)

Tutorial help on Excel® and Word functions can be found on the Microsoft® Office website. There are also additional tutorials via the web offering support for Office products.

Scenario: Shelley Jones has just been elected as  president of the Circular Club of Auburn, Kansas, and she has been asked  to suggest a new fundraising activity for the club. After a  considerable amount of research, Shelley proposed the Circular Club  sponsor a professional rodeo. In her presentation to the club, Shelley  recommends the fundraiser become an annual activity with the following  goals:

  • Continue to grow each year
  • Give back to the community
  • Provide the club a presence in the community

Shelley’s goal in the first year is to have  an activity that would become an “annual community event” and would  break even the first year and raise $5,000 the following year. In  addition, based on the experience of other communities, Shelley believed  a rodeo could grow in popularity so the club would eventually earn an  average of $20,000 annually.

A rodeo committee was formed. Shelley  contacted the world’s oldest and largest rodeo-sanctioning agency to  apply to sponsor a professional rodeo. The sanctioning agency requires a  rodeo to consist of the following five events: Bareback Riding, Bronco  Riding, Steer Wrestling, Bull Riding, and Calf Roping, Team Roping and  Women’s Barrels. Prize money in the amount of $3,000 would be paid to  winners in each of the seven events. Members of the rodeo committee  contracted with RJ Cattle Company, a livestock contractor on the rodeo  circuit, to provide bucking stock, fencing, and chutes. Realizing costs  associated with the rodeo were tremendous and ticket sales would  probably not be sufficient to cover the costs, the rodeo committee sent  letters to local businesses soliciting contributions in exchange for  various sponsorships. Exhibiting Sponsorships are $1,000 to exhibit  products or services, while Major Sponsorships are $600, and Chute  Sponsorships are $500 to have the name of the sponsor’s business on one  of the six bucking chutes. For a contribution of $100, individual  sponsors will be included in a Friends of Rodeo list found in the rodeo  programs.

A local youth group will be contacted to provide concessions to the  public and divide the profits with the Circular Club. The Auburn  Circular Club Pro Rodeo Roundup will be held on June 1, 2, and 3. The  cost of an adult ticket is set at $8 in advance or $10 at the gate; the  cost of a ticket for a child 12 or younger is set at $6 in advance or $8  at the gate. Tickets are not date-specific. Rather, one ticket will  admit an individual to one performance of his or her choice– Friday,  Saturday, or Sunday. The rodeo committee is able to secure a location  through the county supervisors’ board at a nominal cost to the Circular  Club. The arrangement allows for the use of the county fair grounds and  arena for a one-week period. Several months prior to the rodeo, members  of the rodeo committee were notified the bleachers at the arena would  hold 2,500 patrons. On Saturday night, paid attendance was 1,663, but  all seats were filled due to poor gate controls.  Attendance was 898  Friday and 769 on Sunday.

The following revenue and expense figures relate to the first year of the rodeo.

Receipts

Contributions from sponsors      $22,000

Receipts from ticket sales         $28,971

Share of concession profits         $1,513

Sale of programs                           $600

Total receipts                            $53,084

Expenses

Livestock contractor                  $26,000

Prize money                              $21,000

Contestant hospitality                  $3,341*

Sponsor signs for arena               $1,900

Insurance                                    $1,800

Ticket printing                              $1,050

Sanctioning fees                             $925

Entertainment                                 $859

Judging fees                                   $750

Port-a-potties                                  $716

Rent                                               $600

Hay for horses                                 $538

Programs                                         $500

Western hats to first 500 children       $450

Hotel rooms for stock contractor        $325

Utilities                                            $300

Sand for arena                                  $251

Miscellaneous fixed costs                  $105

Total expenses                                            $61,410

Net loss                                                      $ (8,326)

*The club contracted with a local caterer to provide a tent and food  for the contestants. The cost of the food was contingent on the number  of contestants each evening. Information concerning the number of  contestants and the costs incurred are as follows:

Contestants Total Cost

Friday                                  68                            $998

Saturday                              96                          $1,243

Sunday                                83                          $1,100

$3,341

On Wednesday after the rodeo, members of the rodeo committee met to  discuss and critique the rodeo. Jonathan Edmunds, CPA and President of  the Circular Club, commented that the club did not lose money. Rather,  Jonathan said, “The club made an investment in the rodeo.”  The rodeo  committee has requested an analysis of the rodeos performance and  evaluation of the CPA’s review.

Create a minimum 10-slide presentation, including  detailed speaker notes, as the committee’s consultation team and respond  to the following:

  • What did Jonathan Edmunds mean when he said the club had made an  investment in the rodeo? Is his comment consistent with Shelley’s idea  that the club should have a fundraiser that would:
    • Continue to get better each year.
    • Give back to the community.
    • Provide the club a presence in the community? Why or why not?
  • Shelley, Jonathan, and Adrian Stein, the Fundraising Chairperson,  are beginning to make plans for next year’s rodeo. Shelley believes by  negotiating with local feed stores, inn- keepers, and other business  owners, costs can be cut dramatically. Jonathan agrees. After carefully  analyzing costs, Jonathan has estimated the fixed expenses can be pared  to approximately $51,000. In addition, Jonathan estimates variable costs  are 4% of total gross receipts. After talking with business owners who  attended the rodeo, Adrian is confident the funds solicited from  sponsors will increase. Adrian is comfortable in budgeting revenue from  sponsors at $25,600. The local youth group is unwilling to provide  concessions to the audience unless they receive all of the profits. Not  having the personnel to staff the concession booth, members of the  Circular Club reluctantly agree to let the youth group have 100% of the  profits from the concessions. In addition, members of the rodeo  committee, recognizing the net income from programs was only $100,  decide not to sell rodeo programs next year.
    • Compute the break-even point in dollars of ticket sales assuming Adrian and Jonathan are correct in their assumptions.
  • Shelley has just learned you are calculating the break-even point in  dollars of ticket sales. She is still convinced the Club can make a  profit using the assumptions above (second bullet point above).
    • Calculate the dollars of ticket sales needed to earn a target profit of $6,000.
    • Calculate the dollars of ticket sales needed to earn a target profit of $12,000.
  • Are the facilities at the fairgrounds adequate to handle crowds  needed to generate ticket revenues calculated above (third bullet point  above) to earn a $6,000 profit? Show calculations to support your  answers.
  • A few members in the Circular Club do not want to continue with the  annual rodeo. However, Shelley is insistent the Club must continue to  conduct the rodeo as an annual fundraiser. Shelley argues she has spent  hundreds of dollars on western boots, hats, and other items of clothing  to wear to the rodeo. Are the expenses related to Shelley’s purchases of  rodeo clothing relevant costs? Why or why not?
  • Rather than hire the local catering company to cater the Contestant  Hospitality Tent, members of the Circular Club are considering asking  Shady’s Bar-B-Q to cater the event in exchange for a $600 Major Sponsor  spot. In addition, The Fun Shop, a local party supply business, will be  asked to donate a tent to use for the event. The Fun Shop will also be  given a $600 Major Sponsor spot. Several members of the Club are opposed  to this consideration, arguing that the two Major Sponsor spots will  take away from the money to be earned through other sponsors. Adrian  Stein has explained to the members the Major Sponsor signs for the arena  cost only $48 each. In addition, there is more than enough room to  display two additional sponsor signs. What would you encourage the Club  to do concerning the Contestant Hospitality Tent? Would your answer be  different if the arena were limited in the number of additional signs  that could be displayed? What kind of cost would you consider in this  situation that would not be found on a financial statement?
  • Assume you are elected chair of the rodeo committee for next year.  What steps would you suggest the committee take to make the rodeo  profitable?

Show your work in Microsoft® Word or Excel®.

Complete calculations/computations using Microsoft® Word or Excel®.

Format the assignment consistent with APA guidelines.

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