Case Study New City Band & New City Band Teaching Notes
Case Study New City Band As the volunteer business manager for the New City Band (City Band), you are responsible for preparing the operating budget for the organization’s upcoming summer concert season. Each year, City Band presents up to 20 weekend performances, depending on weather conditions. The concerts are free to the public, but the band hangs a pot from the bandstand and people leave small donations in it. On average, City Band gets $100 in donations at each of its performances. In addition to donations, New City pays the band $3,000 per season plus $125 for each performance. City Band also has a small endowment of $100,000 on which it expects to earn 3.5 percent in the coming fiscal year. City Band’s trustees have decided to use that money to pay for operating expenses if they need to. City Band pays its conductor $3,000 for the summer season and has an insurance policy to protect it against any loss of equipment or damage to the bandstand. That policy costs the band $500 for the summer plus $25 per performance. New music costs the band $200 per year. Following Generally Accepted Accounting Principles, the band recognizes music acquisitions as expenses in the year the music is acquired. In addition, City Band pays music publishers an average of $40 per concert for the rights to perform certain pieces in its repertoire. The band has an average of 60 musicians at each of its performances. Each musician is paid $5 per performance.
Question 1. Prepare an operating budget for City Band for the coming fiscal year assuming the band performs on each of its 20 scheduled concert dates.
Question 2. Prepare a flexible budget showing what would happen if the band could only perform on 80 percent of its scheduled concert dates. Question 3. Calculate City Band’s total contribution margin per concert. Lately, some of City Band’s older musicians have been having difficulty climbing the stairs to get up to the bandstand. In addition, there are two disabled musicians who play at all of the band’s rehearsals but are reluctant to play at the concerts because of the difficulty they have accessing the bandstand. City Band’s trustees would like to accommodate both groups of musicians. They have gotten an estimate of $10,000 to make the bandstand accessible. You have lined up a 10-year, $500 per year grant from the State Office of Disabilities and a five-year, $750 per year grant from the Federal Office of the Aging to help pay for the modifications to the bandstand. In addition, the local chapter of the Knights of Columbus has offered to donate $1,500 toward the project. Question 4. If City Band’s cost of capital is 6 percent, should it invest in the bandstand modifications based solely on the Knight’s donation and the proceeds from the grants? Support your answer with the appropriate time value of money calculations.
City Band expected to hold 20 concerts during its last summer concert season and pay an average of 60 musicians $5 per concert for their performances. At the end of the summer, the band had only been able to perform 16 times. The other four performances were rained out. Because of the shortened concert season, the trustees decided to pay the musicians who came to the concerts $6 per performance. On average, 55 musicians were at each performance. Question 5. Calculate City Band’s total musicians’ stipend expense variance for the season. Indicate whether that variance was favorable or unfavorable.
Calculate the portion of that variance that was due to volume. Indicate whether that variance was favorable or unfavorable. Calculate the portion of that variance that was due to quantity. Indicate whether that variance was favorable or unfavorable. Calculate the portion of that variance that was due to the rate paid to the musicians. Indicate whether that variance was favorable or unfavorable. Hint: Be sure to add up the flexible (partial) variances to make sure that total equals the total variance you calculated directly.
Mead Meals on Wheels Center Input: When building spreadsheet models, it is good modeling practice to identify all of the data that you will be inputting into the model and isolate it in a separate worksheet or at the top of the worksheet where you intend to build your analytical model. The inputs for the MMWC case are shown in the Excel excerpt below. To tie the inputs to each of the questions in the case, the input data for each question is in a separate spreadsheet excerpt and labeled to show the problems the data relates to. .
Input Average Fixed Cost per week Revenue per client week Maximum Clients per week number of weeks in a quarter
$ $
36,000 32.00 4,800 13
Difference between bid abd break even Budgeted per client weekly food costs
$ $
0.50 24.00
Actual Meals Delivered 1st Quarter Unit Cost Difference in 1st Quarter Actual Cost in 1st Quarter Additional fixed weekly costs in 1st Quarter Cost of Additional Kitchen Equipment Cost of Capital Interest Rate on Loan Life of Equipment in years Maximum number under the contract Assumed Residual Value
4,600 $ 0.75 $ 23.25 $ 2,000 $ 700,000 9% 8% 5 5,200 10%
Quarterly Fixed Costs per week
$
Quarter1 Quarter 2 Quarter 3 Quarter 4 38,000 $ 34,000 $ 35,000 $ 37,000
Question 1 is a variation of the break-even problem from Chapter 4. It asks you to calculate the maximum amount that MMWC can spend per person per week on food. In other words, what is the largest variable cost that MMWC can afford to pay and still cover all of its fixed costs. From the case you know that the Unit Revenue is $32 per week. To earn that amount, MMWC must feed one person 2 meals per day for seven days or 14 total meals per week. Let's call that the number of contract meals. We know that MMWC's daily capacity is 9,600 meals per day. since the contract calls for feeding each person two meals per day, the means MMWC can feed 4,800 people per day (Q). (9,600 meals / 2 meals per person per day).. It turns out that is also the number of people they can feed each week. Here is why:
weekly capacity in meals People fed per week = --------------------------------------contract meals per person fed
9,600 meals x 7 days = -----------------------------2 meals per day x 7 days
= 4,800 people fed per week @ $ 32 per person To find the formula for how much MMWC can spend per week per person on food, we need to do a little algebra. The base break-even formula is:
Break-even Quantity (Q) =
Fixed Cost (FC) ----------------------------------------------------Unit revenue (P) - Unit Variable Cost (VC)
Where:
Q = 4,800 P = $32 FC = $36,000
Q=
people fed per week per person fed for a week per week
FC --------------P - VC
multiplying both sides of the equation by P - VC we get: Q x (P - VC) = FC expanding the term on the left side we get: Q x P - Q x VC = FC Subtracting Q x R from both sides we get: -Q x VC = FC - Q x P Multiplying both sides by -1 we get: Q x VC = Q x P - FC Dividing both sides by Q we get the formula for the Break-Even Variable Cost: Q x P - FC VC = ------------------Q Substituting the values above, we find that the Break-Even Variable Cost is: 4,800 x $32 - $36,000 VC = ------------------------------- = $24.50 4,800 $24.50 per person per week is the maximum amount that MMWC can spend for food. If you think about this equation, it makes sense. The numerator says that you can only spend what you have left after paying your fixed costs on food. That is total revenue less fixed costs or $117,600 per week. Dividing that number by the maximum number of people MMWC can feed (the denominator - 4,800) gives you the average cost per person fed. That is also the maximum MMWC can spend since FC + VC = TC = TR at break and even every dollar of revenue will have been spent.