Case 4: Capital Budgeting (SMAC)

Galaxy Science Centre (GSC) is a nonprofit organization which was founded in late

19_7 as the first science museum to serve the city of Britannia. GSC's initial construction

and startup costs were provided by provincial and municipal government

grants and private sector contributions. In return for its initial support, the provincial

government expects GSC to operate an annual science fair that is expected to

become one of the premier science fairs in the country within ten years.

GSC's board of trustees reports directly to the municipal government which

provided GSC with the following mandate: (1) to educate the general public, (2) to

support the science programs of local schools, (3) to provide a science resource centre

for the municipality, and (4) to operate on a breakeven basis without the need for further

government funding. The local university, which has been experiencing declining

enrollment in its science programs, especially welcomes the opening of GSC.

The grand opening of GSC is scheduled for the fall of 19_9. Initially, GSC's

services will include various scientific exhibits and educational films. The annual science

fair will include a contest where science projects entered by students are to be

judged and the best three exhibited at GSC. Future plans include adding a gift shop

featuring souvenirs of both the science centre and the city. With the grand opening

quickly approaching, the board decided to hire an independent consultant to resolve

the following issues:

1. Board members questioned how budgeting for operations should be applied to

GSC, what performance measures are possible, and what should be considered

in selecting output measures.

2. Two options are available for financing the computer and related software

needed to assist in the operations of GSCeither buy or lease (see Exhibit A4-

1). The board requested a complete quantitative analysis of these two options

and a recommendation.

3. Given GSC's mandate, the only source of funding to cover the first year's operating

expenses would be through admission charges and a one-time subsidy granted

by the municipality. The board requested that data resulting from an initial market

study and cost analysis (see Exhibit A4-2) be analyzed and an admission price

for the first year of operations be recommended.

4. Without a subsidy from the municipality after the first year, the board wondered

whether it could continue admitting senior citizens and preschool children

free of charge and still break even. Three options (see Exhibit A4-3) were

put forward by the board for analysis.

5. A general pricing policy for items to be sold in the gift shop was needed.

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REQUIRED

As Edyth Plum, the independent consultant hired by GSC's board of trustees, analyze

the five issues for a report, complete with recommendations, to GSC's board of

trustees.