A recently graduated M.B.A., Mark Thomas, had been hired three months ago as assistant direc-

tor of the Abbington Youth Center. Prior to earning his M.B.A., he had worked in several manufac-

turing firms, but he had never worked in a nonprofit organization. He knew little about Abbington's

programs or the educational and social theories in use by the professional staff, but had decided to

take the job since he had been impressed with the Center's attempts to provide high-quality pro-

grams for the children in his community.

Despite his lack of experience in organizations like Abbington, Mr. Thomas had brought some

much-needed management skills to the centers operations. In his short tenure he not only had in-

troduced some new management techniques, but had regularly made attempts to educate the profes-

sional staff in the use of those techniques.

This afternoon's staff meeting was no exception. In attendance would be the center's director,

Helen Fineberg, and the coordinators of the center's three programs: Fiona Mosteller (Infants and

Toddlers Program), Joanne Olivo (Preschool Program), and Don Harris (After-School Program).

As the names suggested, each program was aimed toward a different age-group: the first accepted

children up to the age of three; the second from three to five years of age; and the third from five to

seven years.

Mr. Thomas planned to instruct the program directors in the concept of breakeven analysis; in

order to do so, he had gathered some data on the revenues and costs of the three programs (see Ex-

hibit 1). Using this information, he determined that each student contributed $4,348 to fixed costs

after covering his or her variable costs. Given the fixed costs of $498,700 ($328,000 in the pro-

grams and $170,700 for the center overall), he had calculated that 115 students were needed to

break even.

He had prepared the breakeven chart, shown in Exhibit 2, which he planned to distribute to eve-

ryone at the meeting prior to giving a short lecture on the concept of breakeven analysis. His intent

was to make clear to everyone that enrollment was exactly at breakeven, which did not allow any

margin of safety, and to encourage the program directors to expand the size of their programs by a

few students each so as to provide a more comfortable margin and, if all went well, a substantial

surplus for the center.

The Meeting

At the meeting, several issues arose that Mr. Thomas had not anticipated, and a rather hostile at-

mosphere developed. Ms. Mosteller pointed out that 50 students was the maximum her program

could accommodate, given current classroom space, and wondered exactly how Mr. Thomas ex-

pected her to increase the program's size. Ms. Olivo said she would be happy to expand her pro-

gram by another 10 students, but in order to do so, she would need to hire another teacher, at a cost

of $22,000. She wondered how Mr. Thomas might include this fact in his analysis, and, under the

circumstances, whether the teacher should be considered a fixed or a variable cost. Mr. Harris told

Mr. Thomas that he had been planning all along to add another 15 students to his program, and

wondered why Mr. Thomas had not checked with him about this prior to preparing the figures and

the chart. He too would need to hire another teacher, however, at a cost of $25,000, and also won-

dered whether this was a fixed or variable cost.

Ms. Fineberg seemed quite perplexed by the discussion, and began her comments by asking

Mr. Thomas why he was using averages when the Center had three separate programs. She also in-

dicated that $1,350 was far too low a surplus, since she was hoping to have some extra money

available during the year for painting and some minor renovations, which would cost about

$10,000. She asked Mr. Thomas how he might incorporate this need into his analysis. She also expressed some concern about Mr. Thomas's per-student fees, stating that in talking with people in

other centers she had learned that Abbington's fees were about 10 percent below what others were

charging. She thought an across-the-board increase to make up the difference was called for.

Finally, all three program directors queried Mr. Thomas about his variable-cost-per-student fig-

ure. They asked him how he had derived these figures and whether they included some recent price

increases of about 5 percent in educational supplies. Mr. Thomas stated that they included both

supplies and food, divided about 75 percent/25 percent between the two, but he confessed that he

had not included any price increase in his calculations.

Next Steps

The meeting ended on a less-than-happy note. Mr. Thomas had not had an opportunity to give

his lecture, the program managers felt frustrated that their concerns and plans had not been included

in his analysis, and Ms. Fineberg was quite upset because it appeared as though the center would

not have the funds necessary to pay for the much-needed painting and renovations.

Mr. Thomas returned to his office and wondered whether his decision to work at the center had

been a wise one. Perhaps, he thought, life would be simpler in a manufacturing firm.

Assignment

1. What assumptions are implicit in Mr. Thomas's determination of a breakeven point?

2. Using the data in Exhibit 1, calculate a breakeven point for each of the three programs?

3. On the basis of the suggestions and comments made at the meeting, and making assumptions where necessary,

prepare revisions to Exhibit 1. What is the new breakeven volume for the Center? What is it for each of the

three programs?

4. Based on the information in Exhibit 1, Ms. Fineberg is considering eliminating the After School Program.

What advice would you give her?

Exhibit 1. Program Cost Analysis, Normal Year (1) Infants and After- Toddlers Preschool School Students at full capacity Actual number of students 50 40 25 Fee per student $4,520 $ 5,320 $ 5,970 Total revenue 226,000 212,800 149.250 Variable cost per student 480 1,040 896 Total variable cost 24.000 41.600 22.400 Contribution to program fixed costs $ 202,000 $171,200 $126,850 Less: Program fixed costs 130,000 118.000 80.000 Contribution to allocated fixed costs $ 72,000 $ 53,200 $ 46,850 Less: Allocated fixed costs (2) 42.675 51.210 76.815 Surplus (deficit) $ 29,325 $ 1,990 ($29,965) Aggregate 150 115 $ 5,113 588,050 765 88,000 $ 500,050 328,000 $ 172,050 170,700 $ 1,350