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Galaxy Science Center (GSC) is a nonprofit organization which was founded in late 19_7 as the first science museum to serve the city of Britannia.

Galaxy Science Center (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 center for the municipality, and (4) to operate on a break-even 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 center 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 GSC—either 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.


REQUIRED

As Edyth Plum, the independent consultant hired by GSC’s board of trustees, analyze the five issues and prepare a report, complete with recommendations, to GSC’s board of trustees.EXHIBIT A4-1 GSC Computer Equipment Financing Options Analysis had indicated that GSC should obtain a model XTZ computer and related software for its operations. This equipment has an expected useful life of five years with no estimated salvage value. The two financing options identified by the board of trustees are described below. The appropriate discount rate to evaluate these options was stipulated to be 11%. Option One The XTZ computer and related software could be purchased for $40,500. Since GSC has only $20,000 available for this acquisition, the balance would be financed by a five-year bank loan at an annual interest rate of 11%. Equal annual payments would be due at the end of each year. Option Two The XTZ computer and related software could be leased from Acme Computers Ltd. The lease agreement would be for a five-year period requiring equal payments of S10,000 at the beginning of each yearEXHIBIT A4-2 GSC Expected Admission Levels and Operating Cost Data At the request of the municipality, GSC has agreed to admit senior citizens and preschool chil- dren free of charge during the first year of operations. To compensate GSC, the municipality reluctantly granted a one-time subsidy of $1,000,000 for GSCs first year of operations. GSC must find an adult admission price for the first year which would be sufficient to cover operat- ing costs in excess of the subsidy. GSC would be paid full adult admission up to $6 per person by the board of education and the university for students who attend the science centre A market study confirmed that demand for admissions to GSC would be relatively inelastic at prices at or below $6.50 per admission. The study also produced the following probability dis- tribution for total admissions (adults, students, senior citizens, and preschool children) for the first year of operations assuming an admission price of zero up to $6.50: Total Number of Admissions 950,000 to 1,050,000 1,050,001 to 1,150,000 1,150,001 to 1,250,000 1,250,001 to 1,350,000 1,350,001 to 1,450,000 Probability 0.10 0.25 0.40 0.15 0.10 It was estimated that 20% of the admissions would be senior citizens and preschool children, 60% students, and 20% other adults. Initial cost analysis at various total admission volume levels resulted in the following expected total operating costs for the first year of operations (excluding the XTZ computer and related software costs by including all science fair costs)Total Number of Admissions Total Operating Costs 500,000 1,000,000 1,500,000 $6,080,000 6,390,000 6,700,000 (This analysis assumes linear cost behaviour within the relevant range.)EXHIBIT A4-3 GSC Admission Pricing Policy for Second and Subsequent Years Three admission pricing policy options were identified as follows 1. Admit senior citizens and preschool children free of charge and promote GSC more vigor- ously. It was estimated, for example, that a $200,000 increase in annual promotion and ad- vertising expenditures would generate a 10% increase in total number of admissions. 2. Charge a discounted admission price for senior citizens and preschool children. 3. Admit senior citizens and preschool children free of charge and convince the municipality to continue the subsidy.


 

EXHIBIT A4-1 GSC Computer Equipment Financing Options Analysis had indicated that GSC should obtain a model XTZ computer and related software for its operations. This equipment has an expected useful life of five years with no estimated salvage value. The two financing options identified by the board of trustees are described below. The appropriate discount rate to evaluate these options was stipulated to be 11%. Option One The XTZ computer and related software could be purchased for $40,500. Since GSC has only $20,000 available for this acquisition, the balance would be financed by a five-year bank loan at an annual interest rate of 11%. Equal annual payments would be due at the end of each year. Option Two The XTZ computer and related software could be leased from Acme Computers Ltd. The lease agreement would be for a five-year period requiring equal payments of $10,000 at the beginning of each year.

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