Buddies Break-Even Analysis

Buddies is a charitable organization that sponsors group activities and provides adult companionship for troubled youths from single-parent families. Buddies screens, trains, motivates, and supervises the adult volunteers, who are paired with children referred by local agencies and by parents concerned with their childrens future. The organization provides a service that can augment any professional help a child may be receiving. But its main role is one of prevention by providing a meaningful adult relationship for a child before the child becomes a severe parental or societal problem. Buddies is a nationwide organization that began in 1913 in Pierre, South Dakota, and there are over 300 local agencies throughout the country with the parent office, Buddies Regional, in New Jersey. Buddies Regional provides support in establishing and administering local programs, but each agency is responsible for raising its own funding.

The Bayou Land branch in Lafayette, Louisiana, was started only five months ago and has an operating budget for the current year of $60,000. The budget is modest by most standards but will be hard to achieve given the newness of the organization and the drop in crude oil prices that has hit Lafayette especially hard. About 30 percent of the necessary funds will come from the Acadiana United Appeal, and the remainder from a government grant, some fund-raising events, and donations.

The Importance of the Dance

The final event planned is a dance that the organization hopes will raise $8,000; which is the projected yearly deficit. Although eliminating the shortfall is an important objective, there are other reasons why the dance needs to be successful. The Acadiana United Appeal has made it clear that it wants local agencies to establish their own fund-raising scheme in which it matches every dollar in profit generated by an organization. Buddies Regional also encourages its local agencies to develop their own fiscal base. A number of studies have found that agencies that rely heavily on outside monies tend to stagnate, in the past due to the restrictions that often accompany such monies. Nationwide, United Appeal has been known to oversee quite strictly the running of organizations that it funds heavily. It is precisely this type of rigidity that Buddies Regional wants to avoid by encouraging local units to raise a large proportion of their budget on their own. And although the Acadiana United Appeal has in the past adopted a policy of minimum intervention, one can never be sure when this philosophy might change. Finally, a successful event would raise the statue of Bayou Lands organization. Buddies Regional would raise the agencys classification from an agency-in-formation to a provisional agency, which would enable more children to be served.

Tickets for the dance will be sold at $50 per couple, and the sale of drinks should net $10 per couple. The dance will be held at the Breau Bridge Music Hall, which has a ballroom seating 300 couples. Billy Delacroix, a manager at the music hall and a member of Buddies board of directors, has arranged for the owners to donate the ballroom. Hors doeuvres will be provided at a cost to Buddies of $5.00 per couple, and the $500 will cover labor and miscellaneous expenses. The only other expense is the cost of the band, whose selection is generating some controversy among the dance organizers. The choice is between the Mamou Playboys and the Red Stick Ramblers. Both plan the same type of music, a mixture of zydeco and Cajun music. The Mamou Playboys, however, will cost $6,000, the Red Stick Ramblers only $3,000.

Some Arguments for Each Band

Supporters of the Mamou Playboys believe that this band will increase ticket sales, and they cite the bands 15 years experience and recognition among the 30-45 years old age group, the target population of the dance. These individuals also believe that a long view is appropriate. We cant just look at one year, They argue, But will also have to consider the impact of our decision on future dances. The Mamou Playboys will set the tone for the event and increase its future popularity. This is especially relevant if the United Appeal implements its matching scheme on any money raised by a charity from an event such as the dance. Finally, they point out that if the Mamou Playboys were selected it would be a big deal for Lafayette and the dance would receive more publicity, this benefiting the Buddies organization. They cite this as an intangible factor that should not be ignored.

Supporters of the Red Stick Ramblers agree that the Mamou Playboys are the better band but question whether the Mamou Playboys will generate enough extra sales to make up the increased cost. Both sides feel 200 tickets will likely be sold even if the Red Stick Ramblers are selected, but there is some concern that the dance tickets will not sell as well as expect. After all, says Bill Fabre, an accountant by profession, there is a recession out there. The $50 ticket price may be a bit steep for this town, especially in view of the declining price of oil. Lets be realistic and admit we may not be able to sell 200 tickets. The Mamou Playboys increase the overhead and the Buddies cant afford to take a loss on this dance. Eliminating the deficit has to be our number one priority. There is just no slack in our budget, and any shortfall may will have to come out of the salaries for the staff, which would not only be unfair but would also be bad business. In short we simply do not have the luxury to worry about the future. Lets get by this year and then concern ourselves with future dances.

Supporters of the Red Stick Ramblers do admit that any additional publicity from using the Mamou Playboys would benefit Buddies. They are not convinced, however, that the Mamou Playboys would be best for the organization in the long run. Hopkins points out that two local philanthropists have their eye on our agency. She believes that these individuals would bail us out in the event of a shortfall. But, she cautions, they would be much less likely to support us in the future. Hopkins is convinced that if Buddies can stand on its own this year, these philanthropists will be generous in coming years since they admire agencies that try to be self-supporting. She agrees with Fabre that he Red Stick Ramblers make more sense, though she believe that Fabre is too pessimistic about ticket sales. She wonders, however, whether the price should be lowered to $40 per couple. Perhaps, she speculates, we can more than gain on volume what we would lose on the unit price.

After much discussion all agree it is highly probable that 200 ticket can be sold even if the Red Stick Ramblers are used and that 150 is the absolute lower limit. It is also estimated that lowering the price to $40 will increase sales by 20 to 40 tickets.

Questions

For the questions 1 to 4 assume the price of a ticket is $50.

(a) Calculate the break-even ticket sales for each band.

(b) Express your answer as a percentage of the estimated ticket sales.

(a) Assume the Red Stick Ramblers are selected. Develop a table showing the profits on the dance at the following ticket levels: 150, 200, 250, and 300 (sellout).

(b) repeat part (a) assuming the Mamou Playboys are selected.

3. How many extra tickets must be sold to compensate for the higher cost of the Mamou Playboys?

4. If the dance is to raise $8,000, how many tickets must be sold if the Mamou Playboys are used? The Red Stick Ramblers?

5. evaluate the proposal to lower the price of a ticket to $40. What implications, if any, does it have for the band choice?

6. Based on your previous answers and gather information provided in the case, which band would you pick? Why?

7. The break-even and profit formulas you sued are based on certain assumptions. What are they? Are they likely to hold for this situation? Explain.

8. Suppose the dance organizers were sure that 270 tickets could be sold at a price of $50 regardless of the band used. How would this affect the choice?

9. How would knowledge of the demand curve for each band be helpful for the determining which group to use and what price to charge?