Question

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 1

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