Question

THE BUSINESS SITUATION

                When Shelley Jones became president-elect of the Circular Club of Auburn, Kansas,

she was asked to suggest a new fundraising activity for the club. After a considerable

amount of research, Shelley proposed that the Circular Club sponsor a professional

rodeo. In her presentation to the club, Shelley said that she wanted a

fundraiser that would (1) continue to get better each year, (2) give back to the community,

and (3) provide the club a presence in the community. Shelley’s goal was to

have an activity that would become an “annual community event” and that would

break even the first year and raise $5,000 the following year. In addition, based on

the experience of other communities, Shelley believed that a rodeo could grow in

popularity so that 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.

Because there were a number of team ropers in the area and because they

wanted to include females in the competition, members of the rodeo committee

added Team Roping and Women’s Barrels. Prize money 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 that costs associated with the rodeo were tremendous and that

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 Sponsors would contribute $1,000 to exhibit

their products or services, while Major Sponsors would contribute $600. Chute

Sponsors would contribute $500 to have the name of their business on one of the

six bucking chutes. For a contribution of $100, individuals would be included in

a Friends of Rodeo list found in the rodeo programs. At each performance the

rodeo announcer would repeatedly mention the names of the businesses and individuals

at each level of sponsorship. In addition, large signs and banners with

the names of the businesses of the Exhibiting Sponsors, Major Sponsors, and

Chute Sponsors were to be displayed prominently in the arena.

CaseA local youth group was contacted to provide concessions to the public and

divide the profits with the Circular Club. The Auburn Circular Club Pro Rodeo

Roundup would be held on June 1, 2, and 3. The cost of an adult ticket was set

at $8 in advance or $10 at the gate; the cost of a ticket for a child 12 or younger

was set at $6 in advance or $8 at the gate. Tickets were not date-specific. Rather,

one ticket would admit an individual to one performance of his or her choice—

Friday, Saturday, or Sunday. The rodeo committee was able to secure a location

through the county supervisors board at a nominal cost to the Circular Club. The

arrangement allowed the use of the county fair grounds and arena for a oneweek

period. Several months prior to the rodeo, members of the rodeo committee

had been assured that 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.”

             Please answer #9

7. Shelley, Jonathan, and Adrian Stein, the Fundraising Chairperson, are beginning to make plans for next year’s rodeo. Shelley believes that by negotiating with local feed

stores, innkeepers, and other business owners, costs can be cut dramatically. Jonathan agrees. After carefully analyzing costs, Jonathan has estimated that the fixed expenses can be pared to approximately $51,000. In addition, Jonathan estimates that variable costs are 4% of total gross receipts.  After talking with business owners who attended the rodeo, Adrian is confident that 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 that 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.

8. Shelley has just learned that you are calculating the break-even point in dollars of ticket sales. She is still convinced that the Club can make a profit using the assumptions in number 7 above.

(a) Calculate the dollars of ticket sales needed in order to earn a target profit of $6,000.

(b) Calculate the dollars of ticket sales needed in order to earn a target profit of $12,000.

9. Are the facilities at the fairgrounds adequate to handle crowds needed to generate ticket revenues calculated in number 8 to earn $6000 profit?   Show calculations to support your answers.

Answer 1

For solving point 9, we need to first calculate break even point in ticket sales assuming the assumptions in point 7.

As per point 7, the members of the club estimated to reduce the fixed expenses to 51000 as compared to last year. They also estimated variable costs @ 4% of gross receipts.

Formula for break even sales = FC / Contribution margin

Contribution margin = Sales - Variable costs = 100 - 4 = 96%

Therefore Break even sales = 51000 / 96% = 53125.

This means that the club needs total revenue of 53125 to support all the fixed and variable costs upto this level.

The club estimates revenue from sponsors $25,600. There will be no other income like last year as there will be no share of concession profits and no income from sale of rodeo programs. Thus the balance amount of break even revenue which has to be met from ticket sales = 53125 - 25600 = $27,525

To reverse check it: Total revenue = 25600 +27525 = 53125; Total FC = 51000 and total VC = 53125 x 4%= 2125

Profit = 53125 - 51000-2125 = 0 (NIL). Thus this is the break even sales.

In order to earn a profit of $6000, the club will now incur only variable costs. Hence additional gross ticket sales required will be = 6000*100/96 = 6250.

Now coming to point no 9: Total ticket revenue for generating profits of $6000 will be = 27525 + 6250 = $33775

Total tickets sold last year =1663 + 898 + 769 = 3330

Total revenue from ticket sales last year = 28971

Hence, Average sales price of tickets last year = 28971/3330 = $8.70

At this average sales price of ticket last year, the club needs to sell = 33775 / 8.70 = 3882 total tickets (Approx). Siince the arena can accomodate 2500 persons each day if planned properly, these number of people can be easily be accomodated over a span of 3 days. Hence, we can say that the facilities at Fairgrounds are adequate enough to handle crowds needed to generate ticket revenues to earn $6000.