As an accounting intern working for your local police department, you learn that the department is considering starting a citizen's police academy. In recent years, there have been events that have created friction between the police department and the citizens. The police academy is intended to create goodwill within the community and increase communication between the department and the community. You have been invited to advise the departmental management about managing the financial risk associated with the academy. You have learned that there is a federal program that provides grants to fund citizen police academies and that the program provides a reimbursement of costs up to $600 per participant. Following are estimated costs of the academy as determined by the departmental sponsors of the academy:
Variable costs
Supplies .......... $200
Meals ........... $80
Equipment .......... $150
Fixed costs
Rental for training facilities .. $25,000
Although the chief of police is very supportive of the police academy proposal, he is adamant that there is no slack in the department's budget to cover unreimbursed costs; thus, he has asked for assurance that the costs of the police academy will be covered by the federal grant program.
a. How many citizens must participate in the program to reach the break-even point?
b. Is there financial risk in the proposed police academy for the police department? Explain.
c. What advice would you offer the proponents of the police academy to minimize losses the department could incur in offering the police academy?