Question

The Clark Sports Camp operates three sports programs: basketball, lacrosse and field hockey. The camp provides a unique opportunity for boys and girls to engage in intensive summer sports activities. Parents often bring their all of children for the six week session. Due to diminishing profits in the basketball program, they are considering eliminating the basketball program. Camp owner Mikey Matheny has asked you to review the income statement, determine the impact on profit from dropping the basketball program and make a recommendation.

Clark Sports Camp Project Income Statement
	Total	Basketball	Lacrosse	Field Hockey
Camp Tuition	$190,000	$75,000	$65,000	$50,000
Variable Costs for Food and Staff	$26,000	$12,000	$8,000	$6,000
Contribution Margin	$164,000	$63,000	$57,000	$44,000
Fixed Expenses
Rent - Traceable	$25,000	$10,000	$7,500	$7,500
Salaries of Sports Program Directors*	$21,000	$10,000	$10,000	$1,000
Allocated Common Fixed Expenses**	$90,000	$41,538	$27,692	$20,769
Total Fixed Expenses	$136,000	$61,538	$45,192	$29,269
Net Operating Income (Loss)	$28,000	$1,462	$11,808	$14,731
*There is NO alternative work for the sports directors, if the sport program is eliminated, the sport program director will be eliminated. **Common Fixed Costs are allocated based upon the number of campers but will remain constant. 1. What is the impact on profit if the basketball program is dropped? Assume now that we are able to eliminate $50,000 of the allocated fixed costs if we drop the basketball program. What do you recommend? Write a memo to Mr. Matheny outlining your recommendation and your reasoning. Be sure to consider all of the stakeholders and use an appropriate decision model.

Answer 1

Particulars	$
Benefit
Reduction in fixed expenses
Allocated Fixed cost	50,000
Salary of sports program director	10,000
Rent traceable to basketball division	10,000
	70,000
Cost
Loss of contribution	63,000
	63,000
Net benefit	7,000

Profits would increase by $ 7,000 if the basketball division is dropped.

It is recommended to drop the basketball division since the benefit of dropping it outweighs the cost of carrying on. This course of action is warranted only if the dropping of basketball division does not potentially reduces demand of the other divisions. Based on the fixed cost allocation it can also be seen that the number of campers for the basketball division is more hence the loss of repute has to be kept in mind, if any before dropping the basketball division.

Memo

Purely from a financial standpoint the basket ball division has to be dropped, since if dropped it results in increase of profit by $ 7,000 to $ 35,000 from the existing level of $ 28,000.There are various other non financial factors such as loss of demand of other divisions, loss of repute, impact on variable cost of other divisions (example-quantity discounts) are also to be kept in mind before taking a decision since the basketball division has more number of campers than others.Activity based costing can be used to better establish fixed cost for each division to analyze minute levels of cost rather than allocating them based on number of campers at the larger level.