In: Accounting
The local chapter of the Rotary Foundation is planning a fundraiser. The chapter estimates that renting the auditorium and paying for the sound system and performers and other costs would come to $15,000. The chapter expects to charge $50 per person. Variable costs are negligible (i.e. assume variable costs = $0 per person).
a) What is the required attendance for the chapter to raise $21,000 toward charity?
b) The chapter also proposes to have a cash bar at the event. They estimate that the average person would spend $20 and that the contribution margin ratio for the cash bar would be 50%. In light of this additional information, what is the required attendance for the chapter to raise $21,000 toward charity?
c) Assume that they decide to have a cash bar and the event succeeds in raising exactly $21,000 for the charity. Evaluate the margin of safety and operating leverage for the event.
Answer to part (a) :
Estimated Fixed expenses = $15,000
Revenue per attendent = $50 per person
Variable expenses = Nil
Net Fundraising = (No of person attended * Revenue charged per attendent) - Fixed Costs
Therefore, for the required fundraising of $21,000,
$21,000 = (No of person attended * $50) - $15,000
No of persons = ($21,000 + 15,000) / $50
Hence,
No of person required to attent = 720 persons.
Answer to Part (b)
Now, if the foundation also plans to arrange a cash bar following shall be the calculations.
{Note : Contribution Margin = Revenue - variable cost;
Contribution Margin Ratio = }
Contribution Margin Ratio of cash bar = 50%.
Average per person revenue at cash bar = $20
Hence contribution per person from cash bar = 50% of $20 i.e. $10.
Variable cost per person = $20 - $10 = $10.
Contribution per person from entry charges = $50 (since there are no variable expenses attributable to entry charge)
Therefore, Total contribution of event per person attended = $10 + $50 i.e. $60
Now,
Net fund Raising = (No. of person attended * Tatal Contribution per person ) - Fixed Expenses.
Therefore, for the required fundraising of $21,000,
$21,000 = (No. of person attended * $60) - $15,000
No. of person = ($21,000 + $15,000) / $60
Hence,
No of person required to attent = 600 persons.
Answer to part (c)
Now, it is given that foundation has organised the event as proposed in the part b and also has been able to raise exactly $21,000 which means the No. of persons attended would have been 600 persons as calculated in part b of the question.
Break Even no. of persons =
Break Even persons = $15,000 / $60 per person i.e. 250 persons.
Now, Revenue at Break even no of persons (Break Even Revenue) = Break even persons * (Entry charges per person + cash bar revenue per person)
= 250 persons * ($50 + $20) per person
Break Even Revenue = $17,500.
Margin of Safety = Actual Revenue - Break Even revenue
= { No. of persons attended * (Entry charges per person + cash bar revenue per person) }- $17,500
= {600 * $(50 +20)} - $17,500
= $42,000 - $17,500
= $24,500
Net operating income of the event = Actual Revenue - Variable expenses - fixed expenses
= $42,000 - (600 person * $10/person) - $15,000
= $42,000 - $6,000 - $15,000
= $21,000
Contribution Margin of the Event = Total revenue - variable cost
= $42,000 - $6,000
= $ 36,000.
Operating leverage of the event =
= $36,000 / $21,000
= 1.71