Question

City Art Museum ("City") is considering hosting a travelling exhibit of paintings by a famous artist, sponsored by the Smithsonian Institution. The Smithsonian charges $300,000 for a one-month exhibit, which covers all costs of insurance and transportation. They will also receive 15% of gross ticket sales from the exhibit. City will incur costs of $75,000 to modify exhibit space for these paintings; the modifications would have no value afterward. Additional staff for ticket sales and security will cost $43,000. City will pay $55,000 to advertise the exhibit. It is expected that 14,000 visitors will purchase the exhibit ticket for $50, which would include access to the entire museum. Of these, it is estimated that 11,000 would otherwise not have attended the museum, while 3,000 would have purchased a regular admission ticket for $30 even without the special exhibit. It is estimated the increase in visitors will result in additional sales of $230,000 for the gift shop, and $80,000 for the coffee shop. Additional staffing for these units will cost $22,000. The gift shop normally has gross margin of 40%, and the coffee shop, 65%.

Determine the incremental profit or loss to City Art Museum of hosting the travelling exhibit.

Answer 1

Answer:

City Art Museum:

Charges paid to the Smithsonian $300,000 for a one-month exhibit. Hence $300,000 is incremental cost.

The Smithsonian will receive 15% of gross ticket sales from the exhibit = 14000 * $50 * 15% = $105,000. This is incremental cost for City of Art Museum.

City will incur costs of $75,000 to modify exhibit space for these paintings.Hence $75,000 is incremental cost.

Additional staff for ticket sales and security will cost $43,000. Hence $43,000 is incremental cost.

City will pay $55,000 to advertise the exhibit.Hence $55,000 is an incremental cost.

Revenue from Gross ticket sales from the exhibit = 14000 * $50 = $700,000 and

Loss of revenue = 3000 * $30 = $90,000

Incremental gross profit from sale of gift shop = $230000 * 40% = $92,000

Incremental gross profit from sale of coffee shop = $80000 * 65% = $52,000

Additional staffing for these units will cost $22,000. Hence $22,000 will incremental cost.

The incremental revenue/gross profit and incremental cost/loss of revenue is tabulated and summed up below:

Incremental profit to City Art Museum = 844000 - 690000 =$154,000

Incremental profit = $154,000