Governmental Budgeting and Accounting

This mini-case covers a number of the major concepts that we have covered in class this semester. Specifically, the exam requires you to perform a break-even analysis with a weighted average contribution margin, prepare a quarterly operating budget, and consider a capital investment using the net present value technique. The answers are cumulative. You cannot skip any section and do the next.

You may make whatever assumptions you think are necessary to answer any question. If needed, be sure to state every assumption explicitly. Turn in your answers in this Word document along with the supporting calculations in Excel spreadsheets.

All of the information that you need to answer a given question is provided in the text that immediately precedes the question and the answers to the questions that precede it. Read the entire problem set before you begin. Make sure you understand the questions before answering them!

Santa Fe Museum of Southwestern Art

The Santa Fe Museum of Southwestern Art (SFMSA) presents rotating exhibits of the works of artists and artisans from the Southwestern United States. Historically, the museum has derived its support from three sources: grants, annual memberships, and visitor revenues. For the 2017 fiscal year, SFMSA knows that it will receive $495,000 in grants from various sources. It also expects 1,375 people to be supporting members of the museum. On average, supporting members give SFMSA $105.75 per year. You can think of the support from grants and memberships as Fixed Revenues. The museum expects the following mix of visitors during 2017, each paying the amount shown in the right column of the schedule.

Type of Visitor	Percent of Total	Price
Regular	60%	$6.00
Group	18%	$3.00
Senior Citizen	12%	$2.00
Student	10%	$1.00

SFMSA has $965,000 of fixed expenses each year. In addition, the museum spends an average of $0.62 per visitor for handouts that describe the exhibits on display. SFMSA estimates that it has variable electric costs of $0.10 per visitor. Plus, the museum offers each visitor the option of receiving an audio recording which describes the featured exhibit of the month. Visitors are allowed to keep the recording as a memento of their visit. Historically, these recordings have cost the museum $1.30 per copy to produce and replicate. On average, 25% of the people visiting the museum have taken advantage of the free audio recording offer.

Problem 1. The Director of the museum has asked you to tell her the minimum number of total visitors that must come to the museum each year in order for SFMSA to break even. Using the information given above, what is SFMSAs break-even visitor volume? (40 points)

Because of Santa Fes location in the mountains of New Mexico, the museum tends to have a seasonal pattern to its visitor flow with proportionally more people visiting SFMSA in the summer than in the winter. In addition, revenue from grants and memberships tend to flow into the museum unevenly throughout the year. The seasonal flow of visitor, grants and membership revenues is distributed throughout the year as follows:

P11.1021 Summer Session - Replacement Assignment Number 5

	Quarter 1	Quarter 2	Quarter 3	Quarter 4
Visitors	20%	25%	40%	15%
Membership Revenue	40%	20%	20%	20%
Grant revenue	25%	50%	10%	15%

Weighted Average Price per ticket = (Weight of Regular visitor in total tickets sold x Price of ticket) + (Weight of Group visitors in total tickets sold x Price of ticket) + (Weight of Senior Citizen visitor in total tickets sold x Price of ticket) + (Weight of Student visitor in total tickets sold x Price of ticket)

=> (0.6 x $6) + (0.18 x $3) + (0.12 x $2) + (0.10 x $1) = $4.48 per ticket

Variable cost per visitor = Cost of handouts + variable electric costs + (Cost of audio recording x 25%)

=> $0.62 + $0.10 + ($1.30 x 25%) = $1.045

Contribution per ticket = Selling Price Variable cost => $4.48 - $1.045 = $3.435

Total Fixed Cost = $965,000 Fixed Revenues = Grant + Membership Revenue => $495,000 + ($105.75 x 1,375) = $640,406.25

Remaining Fixed cost = $965,000 - $640,406.25 = $324,593.75

Break-even point = Fixed cost / Contribution per ticket

=> $324,593.75 / $3.435 = 94,495.99 or 94,496

So, total 94,496 tickets with stated percentage of visitor type are required to break-even.

Fixed expenses are distributed evenly throughout the year i.e. 25% per quarter. The museums marketing director forecasts that 82,000 people will visit the museum during fiscal year 2017.

SFMSAs Director of Marketing has convinced the Executive Director that a museum shop can be operated profitably in a small space just off the main entrance. She agrees and the shop is scheduled to open on April 1, 2017, the first day of the second quarter. The Marketing Director estimates that 5% of the people who visit the museum will make purchases from the shop. Based on his experience, he expects the average purchase to be $50. SFMSAs Business Manager estimates that the cost-of-goods-sold will be 75% of the museum-shops sales revenue. The shop will be staffed by volunteers at no cost to SFMSA.

Problem 2. Using the information above, prepare a properly formatted operating budget for SFMSA for each of the four quarters in fiscal year 2017 and summarize the budget for the full year. (45 points)

SFMSA has just been approached by the Curator of Special Exhibits at the Smithsonian Museum. The Smithsonian has offered to lend SFMSA a rare collection of nineteenth century Navajo crafts. The collection would remain at the museum for a five-year period after which it would be returned to the Navajo nation. To house the exhibit, SFMSA will have to upgrade its environmental and security systems at a one-time cost of $300,000. This is the only cash outflow associated with the decision.

Since this may be the last time that this collection will be exhibited in its entirety, the Executive Director is enthusiastic about the impact that it will have on visitor volume and the reputation of the museum. The Marketing Director forecasts that 900 incremental visitors are likely to be drawn to the museum each month that the exhibit is at SFMSA.

The director wants you to tell her if the exhibit is financially self-sufficient or if she will need to get a grant to support it. You know that SFMSAs cost of capital is 8%. You also know the marginal contribution generated by each incremental visitor to the museum from your work on the break-even analysis. Do not count on any gift shop purchases from the incremental visitors.

Problem 3. What do you tell her? Can SFMSA afford to show the exhibit based solely on the marginal contribution from incremental visitors? If the exhibit is not financially self-sufficient, how large a grant will SFMSA need to get to meet the projected shortfall? Support your recommendation and present your findings in a way that the director will understand. (40 points)

I have answered problem 1, the answer is in bold. I need help answering problem 2 and 3.