I need help on the Boulder Public School Case Study . There are three questions asked at the end of the case study.

HBSP Product Number TCG239. Rev. Oct. 2015 THE CRIMSON PRESS CURRICULUM CENTER THE CRIMSON GROUP, INC. Boulder Public Schools Edward Caton, a teacher in a midsize elementary school in Boulder, Colorado, hoped someday to rise through the administrative ranks to serve as a principal of his own school, but he felt that to do so, he should understand more about the position to which he aspired. This was especially important to him in terms of the control he might have over the budget, which he knew was central to real power in many organizations. In an effort to learn more about the operations of the Boulder Public Schools, he set up some informational interviews with the principals of an elementary school, a middle school, and a high school. Before making those rounds, he visited the headquarters of the Boulder School Committee to obtain background information for his interviews. BACKGROUND Mr. Caton learned that the Department of Implementation (DI) was central to the school system. It's manager reported directly to the Superintendent of Schools. The DI was responsible for making school enrollment projections each December for the coming fiscal year (which ran from July to June). These projections were important since annual staffing needs for each school were determined by a rather complex formula that used the DI's projections as the starting point. Moreover, since personnel formed the bulk of the budget, these projections effectively determined a school's budget. Each school had a few weeks to challenge the DI's projections, and, if a convincing argument could be made, the DI would modify them. Final enrollment projections were established by mid-January of each year. Mr. Caton learned that Boulder, along with many other large cities, had seen declining enrollments in recent years. The decline was caused by a slowing of the birthrate, but also, in Boulder's case, by flight from the city in the face of the desegregation orders which created busing and some violence within the schools. The result was not only a drop in enrollments, but also a change in the composition of the school system population. Specifically, during the past 15 years, the proportion of white students had dropped from 64 percent to only 27 percent. Black students, by contrast, had increased during those same years from 30 to 48 percent, and Hispanics from 4 to 17 percent. Moreover, the proportion of students termed very poor had increased, by one estimate, to two-thirds of the total; 60 percent of the families of Boulder public school students were classified as being at the poverty level of income as defined in federal guidelines. Retrenchment had been necessary in the face of these shrinking enrollments, Staff reductions and the closing of school buildings had become almost commonplace during this era. At present, the BPS operated 77 elementary schools grades K-5, and 1 grades K-8; 22 middle schools grades 6-8, and 1 grades 7-8; and 17 high schools. Nearly 4,000 teachers worked in these schools. THE UPCOMING FISCAL YEAR BUDGET Recently, the city had witnessed the beginnings of a rise in enrollments, and the DI was forecasting an increase to some 58,000 students in the upcoming fiscal year. The budget for the year had been set at $293 million, divided between two funds: Number 017 (General School Purposes, or GSP), which comprised $285 million of the total, and Number 027 (Facilities Management/Alterations and Repairs, or A&R), which accounted for the remaining $8 million. _____________________________________________________________________________________________ This case was prepared by Dena Rakoff and Professor David W. Young. It is intended as a basis for class discussion and not to illustrate either effective or ineffective handling of an administrative situation. Copyright 2015 by The Crimson Group, Inc. To order copies or request permission to reproduce this document, contact Harvard Business Publications (http://hbsp.harvard.edu/). Under provisions of United States and international copyright laws, no part of this document may be reproduced, stored, or transmitted in any form or by any means without written permission from The Crimson Group (www.thecrimsongroup.org) TCG239 Boulder Public Schools 2 of 9 _____________________________________________________________________________________________ The Special Education and Bilingual Education acts of the Colorado State Laws mandated certain levels of spending for their constituents. In the upcoming year, the portion of the Boulder School Committee budget assigned to those acts was 28 percent. Despite some state financial support for these mandates, much of the funding had to be provided by the School Committee, thereby limiting the funds available for regular education programs The State constitution prescribed a formula that determined the amount that the City of Boulder was required to provide to Boulder Public Schools; the school system received this automatically, without being required to make a justification. For the upcoming fiscal year, this \"constitutional base\" figure was $224.5 million. For additional revenue, the school system had to convince the city of its needs. For the upcoming year, this \"supplemental appropriation\" from the city was $57.9 million. In addition, the school system expected revenues from miscellaneous sources, mostly federal government entitlement programs, of $10.6 million. These amounts equaled the $293 million budgeted expenditures. CONTROL OF THE BUDGET FORMULATION PROCESS Much of the control of the budget process appeared to Mr. Caton to derive from the Central Office. Under the leadership of a new Superintendent, there had been an emphasis given to centralizing much of the decision making. He advocated a tripartite objective--quality education, equal access, and accountability--and he wanted to reduce what he called operational inefficiencies. In his short tenure with the Boulder schools he had developed the Boulder Education Plan, a document outlining the mission and long-range goals for the system. Indeed, only a few months after assuming office, he had launched a new budget system with new procedures and committees. This new budgeting system was explained in a 100-page document entitled Superintendent's Budget Perspective for the Boulder Public Schools, and was supplemented with two budget manuals, each about 30-50 pages long. The budget document itself was some 75 pages long. In January, in accordance with the new budgeting system, the principals and headmasters of each school had been given budget packets to assist them in preparing their budgets. These packets included forms such as a school profile, requesting formulation of goals and program directions; a program summary on which to detail plans for using allotted staff; and a programmatic reductions form, which allowed the principals and headmasters to make an argument for restoring previously withdrawn funds by documenting the impact of the cut. The principals and headmasters had about 20 days to complete these documents and to submit them to District Superintendents. About a month after that, the District Superintendents had been required to submit the packets to the Central Office. Reviews and hearings had taken place on several community and committee levels, as well as on the central level, prior to arriving at a final budget. Mr. Caton had read that the new Superintendent's longer-term objective for the budget formulation process was a \"zero-based\" model, where all spending would begin with an empty line and build on a program-by-program basis, in accordance with the rationale for each program. However, that plan had not been in place for the current budget, which had been simply a maintenance budget, keeping stable spending levels from the previous year, combined with a few initiatives and a few cuts. The result was an increase of about 8 percent over the prior year's budget of $270 million. Mr. Caton noticed that of the $293 million, $190 million consisted of personnel expenditures, including $121 million for teachers and substitutes. He assumed that this money, and much but not all of the administrative support costs, were quite difficult to reduce, given enrollment levels and union contracts for salary levels and teacher-student ratios. Moreover, budget maneuverability appeared to him to be quite restricted by a variety of \"givens\" within the system: curriculum requirements, accompanied by citywide tests; promotion and graduation requirements; and even length-of-class-period dictates. All of these requirements were handed down by the School Committee. He even had heard of rumors of an initiative being developed by the Colorado De- TCG239 Boulder Public Schools 3 of 9 _____________________________________________________________________________________________ partment of Education to require schools to report on matters such as truant days, suspension days, dropouts, and high school seniors' post-graduation plans. He wondered what this would imply for the availability of state funds for individual schools within the system. Mr. Caton also had observed what he thought to be a troublesome dichotomy within the system. On the one hand, he had seen a memorandum from the Deputy Superintendent for Finance and Administration, describing some options that gave principals and headmasters greater budget flexibility (Exhibit 1). But on the other hand, he noted that the new Superintendent was in some ways decreasing the autonomy of schools. He continually heard, for instance, about the slowing of progress toward what the previous Superintendent had called School-Based Management, a program that had made great strides in placing the locus for much decision making in the hands of each school and local community. PERSPECTIVE OF THE PRINCIPALS AND HEADMASTERS Armed with some sense of the school system at large, and toting a set of documents gathered from the Central Office, Mr. Caton next ventured out into the field to interview some school principals. He decided to first visit a high school, followed by an elementary school and a middle school. The High School The high school Mr. Caton visited was relatively new, with an enrollment of some 900 students. He began by attempting to learn more about the matter of budgetary discretion: Caton: What I'd like to know is where you feel that you have any budgetary discretion. Is the entire procedure out of your hands? Headmaster: Well, no, not entirely. Look, for instance, at my 620 account. That's the budgetary line that covers Instructional Materials. It's fairly broad, including mainly supplies--books, paper, that sort of thing. The total amount assigned to me in September--or actually in late spring-is determined by my projected student enrollment. A fixed part is removed from my allocation before I ever get the opportunity to assign it; that part covers equipment rental and that sort of thing. Let's say I get about an $85,000 allotment; $8,000-$9,000 of that might be assigned before I see the funds. Then I have the rest to spend as I see fit. No, let me modify that. I have control over the items purchased with the rest and over the timing of that spending--but within certain guidelines. I must order books that appear on the list of School Committee-approved publications. I must use the vendors identified by them as approved. If there is something I want under $2,000, I can arrange my own vendor. However, I still have to go through the central purchasing format. And, to order books not on the list, I have to get approval from the Department of Curriculum and Instruction, which is quite time-consuming. In terms of when I spend my funds, there is some pressure to use up the money quickly. You never know when the Central Office might issue a spending freeze, and those monies you were saving for a particular midyear purchase vanish. What's more, sometimes, your money is needed elsewhere--and it's wiped out of your account. So, spend quickly is my motto. I very much wish I could use the money in a more measured way. Rolling over funds from year to year is a good example of a power that would enable me to save for items greatly needed, or to not spend when the need wasn't strong. But, we cannot keep any surplus till the following year, so I spend now! If I could choose my vendors, I'm sure I could make more informed choices than the Central people can. I'm sure I could get better prices. But, as I said before, as soon as I make a purchase of over $2,000, I must use the approved sellers, or if no appropriate ones are listed, put the proposed purchase out to bid, which makes for a very lengthy procedure. TCG239 Boulder Public Schools 4 of 9 _____________________________________________________________________________________________ Caton: I think I heard about money held for payment of substitutes, which reverts to you during the year if you don't use your full allotment of subs. Is that useful to you? Headmaster: Sometimes a portion of the unspent balance does come to the school for us to use as we see fit. We've gotten as much as $7,000 in a year that way. I leave the spending decision to the faculty senate. But, again, we bump up against the issue of inability to choose vendors by ourselves. And, you should consider the pressure felt by the faculty in knowing that their absences determine just how much of these funds all of us will have to use. Sometimes there are legitimate reasons to be out--personal sickness, ill children, etc. And, the teachers' union rises in agitation when they worry about too much pressure being put on people not to take advantage of their legitimate benefits. To tell you the truth, I'd rather spend my time solving real problems than focus too much on this \"boon.\" Caton: Is there any opportunity to handle your own money more directly when you are awarded grant money? Headmaster: Yes and no. I recently got an outside grant, funded by the Bank of Boulder and administered by the Central Office. In that case, I had to comply with the usual spending procedures. However, I also had a Carnegie grant of $30,000, and since that was not administered by Central, I could dispense the money as I saw fit. Caton: I understand that your budget's size is determined by the projected student enrollment. What happens if you take in more students than either you or the Department of Implementation foresaw? Headmaster: An addendum to the budget is possible. I do feel very strongly, though, that needs and program offerings, rather than numbers, should drive the budget. I'd like to be able to fund a program to train teachers to focus on problem-solving skills here, for instance. Caton: Is there any way that you, here in your school, can control the numbers reported to Central? Headmaster: Yes. I try to clean up my DNRs quickly. That stands for \"Did Not Report\"--in other words, students who were supposed to come to our school but either moved or are attending another school. I don't want them on my rolls any longer than necessary. I send out an attendance officer early to investigate those who do not report, and to drop them early. Caton: But, doesn't that penalize you when it comes to determining your enrollment? Headmaster: I run into union trouble if I don't drop them: they make the classes look unrealistically large. My truancy rate looks too large, also. I like clean books. Caton: What control do you have over changes in budget procedure? How would you go about getting some of these revisions made? Headmaster: I have a policy of always keeping parent groups informed. It's most important to know how to utilize your constituencies. The Elementary School Next, Mr. Caton visited an elementary school, built in the 1970s, with an enrollment of 700. Principal: Caton: So, you want to know where I have any discretionary spending power. The 620 account, that's key. Maybe 12% of that is pre-assigned; the rest is mine to do with as I see fit. Look, here's a copy of the latest expenditure report for this school from Central (Exhibit 2). As you can see, here's my 620 line. It shows me budgeted for about $59,000. Supposedly, according to this, $20,000 has already been spent by me--not by Central on its predetermined purchases. But I know that I've spent more than $20,000. It's very important for you to keep records in-house. That's the only way you can answer them downtown when they say you've overspent, or when they try to assign your funds elsewhere, or when you don't know how much you have left because the expenditure reports don't arrive in a very timely manner. Don't you get funds from unfilled vacancies to use within your school? TCG239 Boulder Public Schools 5 of 9 _____________________________________________________________________________________________ Principal: They don't come here. Caton: What about unspent substitute money? Principal: I think that gets reassigned. I don't spend it. But, maybe the reason is that my per diem line gets charged for the long-term substitutes I seem to need each year. I don't suffer, though. I manage to make things happen. I came to this school when it was a shambles. I've created a very good faculty. Some of the people who contributed very little have left. Caton: How did you bring that about? Principal: I simply let my expectations be known; if people wanted to work with me, they stayed; if they didn't, most of them left. Of course there are exceptions. It took me a few years to get the support of the community. But now I can get parents in to help with the video workshop or with field trips any time I need them. I'm about to launch a program for parents to train them in carrying on at home the teaching that we begin here during the day. Caton: Do you have any other sources of funds? Principal: Grants. Grant application-writing, that's something my teachers spend a lot of time on. One of my teachers is presenting a workshop on that during the upcoming Teacher Professional Workshop Day. They really produce. Grants give us some discretionary money. We sometimes get them for school-wide use, and sometimes individual teachers get them for use with specific classes. We really must look to external sources. Sales of candy or the like are another place where we turn up money we can use for whatever ends we choose. Parents and children help, last year we raised almost $7,500 through sales. That allows us to buy new blackboards, bulletin boards, to take field trips, and to do some repair of the facilities, which happen to be in fairly poor shape. Fortunately, neither this money, nor our 188 money from the State carry any vendor requirements. As a matter of fact, look at the 730 account, repairs and maintenance of buildings and grounds. You can see I have an empty line there. The School Committee isn't paying for non-emergencies. As I say, though, I'm able to get what I need. And, if a teacher needs something, and makes a good case to me for that need, I can provide it. There's always a way. But, I do have somewhere in my head a list of changes I feel are necessary. One item on that list is the method of determining the budget in the first place. What we need is a program-based budget. We should be able to designate the needs we must meet from the level of the school, and then be given the means and the responsibility to meet them. We shouldn't have to work on what Central says to work on. They claim they understand our programs, but then they do something like what they did this morning--send me a seventh \"Behavior Lab\" student when six is the limit. As you know enrollment predictions are very important in determining the budget. Central sends me their estimate every year, and I'm allowed to counter it with my own predictions. In fact, my predictions for the past few years have been right on target. I've worked hard to prove to Central that my predictions are the accurate ones. Once the budget is set, I can move teachers and use aides to cover if I need to. And, I've been able to distribute enrichment subjects among the student body in a fair way by creating a seven-day roster week; with that, each student gets music or art not once a week in the traditional way, but once every seven-day rotation. Thereby I keep my classes down to a manageable size. The Middle School Finally, Mr. Caton went to a middle school of about 600 pupils, constructed in the late 1960s. Some people had told him that middle schools were particularly difficult to manage because of their unstable demographics. He also had learned that high schools received more resources than TCG239 Boulder Public Schools 6 of 9 _____________________________________________________________________________________________ middle schools due, in part, to the fact that high schools operated with departmentalized systems and differentiated staffing. But he also had been informed that, in the past few years, the middle schools had received funding for some additional positions, such as Directors of Instruction, Instructional Support teachers, and Targeted Reading teachers. He was interested therefore to learn more about the perspective of a principal of a middle school. Principal: You have to understand, Boulder has a system of priorities in its school department. Most important is the high school. They get more personnel, more budget, and more discretionary funding; that's probably because the media features them, and media attention must be respected. Next come the elementary schools, and finally the middle schools. Historically, our size and importance have been determined by the surges and retractions in the elementary school populations. As you probably know, the junior high schools, which middle schools supplanted, ran from grades 7 through 9. Because of this dependency on elementary school enrollment, we, at times, have been as inclusive as grades 4 through 8; sometimes we're 6 through 8. That variation has made it difficult to focus on an age group, and the abrupt changes have been disruptive to teachers as well. Middle school years, especially 7th and 8th grades, are important years; those are when the decision to drop out is made. We're beginning to get some funds and programs now to combat middle-school-specific problems like overage students, dropouts, and teenage pregnancy. Caton: Speaking of money, have you been able to take advantage of the \"lag funds,\" that is, the unspent money from unfilled vacancies in your school that I understand reverts to you for your own use? Principal: That's tricky. I have a vacancy right now for an assistant principal. I do get some of the salary money now, about three months' worth to cover August through this month of October, if I take a new person. But if I take a recall, I lose whatever funds are necessary to pay that person retroactively for the difference between his or her previous salary and this one. So, it's likely not to be as much money as you might expect. But if I do get some money, I can file a Form FA-01, asking for the money to be transferred to my 620 account, and from there I have some discretion as to what it will buy. You might think that leaving a position vacant could buy you the money you need for programs or whatever. Not really. The union has come in when positions remain unfilled if there are any unassigned teachers within that certificate area. They worry about their members not being utilized--and paid. And, what's more, if you leave a position unfilled for too long, Central might deem your need for the position reduced, and eliminate the funding for it in the coming budget year. Numbers, in particular enrollments, are all-important. Special Education and Bilingual Education, both of which are programs mandated by the state, but only partially reimbursed by state or federal funds, put a drain on our resources. When it comes to regular education programs, we have trouble making a case for them. The Department of Implementation each winter projects our enrollment for next year. My projected and actual enrollment figures are never the same. If you think the figures generated for your school are too small when the March budget figures are announced, you can petition to have the projections altered by making a good statistical argument. If your argument is considered valid, your teacher allotment will be raised, but your 620 account will not--it will be calculated on the basis of the original enrollment projections. Teacher allotments are contractual according to class size; instructional materials are not. The result is that if I get enough students to push a special education class over its limit, for example, I'm given an extra teacher, but I do not necessarily get enough extra 620 money to provide the students with books. Caton: Do you find the 620 account something you can use to increase expenditures where you feel they're needed? TCG239 Boulder Public Schools 7 of 9 _____________________________________________________________________________________________ Principal: Yes, to some extent. But some of those expenditures are fixed: paper, Xerox supplies, art supplies, membership in various organizations; all those things are taken from your 620 account before the line is open to you. Prediction of costs is a bit difficult here also. Some years, for instance, maintenance of the Xerox is done by Central; some years, you have to absorb the costs yourself. It's important to stay in touch with Central each year to learn the current procedures. After this final interview Mr. Caton looked forward to the evening, when he would sit back in his favorite armchair, notes in hand. From that vantage point, he would attempt to make a coherent whole from the various parts. Assignment 1. Define the key features of the current management control system in the Boulder Public Schools. 2. As the manager (principal or headmaster) of a Boulder public school, what changes would you like to see made in the management control system? (Your proposals should, of course, be limited to those that you think might be acceptable to headquarters.) 3. As the Deputy School Superintendent, what would be your reaction to these proposals? TCG239 Boulder Public Schools 8 of 9 _____________________________________________________________________________________________ Exhibit 1. Memorandum to Principals and Headmasters from the Deputy Superintendent, Finance and Administration Subject: Budget Flexibility One major outgrowth of surveys and interviews done in connection with the Finance and Administration Task Force last spring is that desire for budget flexibility continues to be one of the highest priorities of principals and headmasters. As you know, the School-Based Management Project had already given considerable impetus to this concept, and piloted it in certain schools. The Office of School Site Management has emphasized it as a priority for this school year. This fiscal year promises to be a very tight budget period. While the schools and programs appear to be adequately staffed, lack of appropriate initial funding and unanticipated large-scale costs in transportation and other areas will put a yearlong squeeze on the total school budget. However, since we will more than likely be in tight budget situations for years to come, we should not use that as a reason for totally avoiding the issue of budget flexibility. Therefore with the new Superintendent's approval, we will undertake initial moves on a systemwide basis this year. The budget flexibility options open to all principals and headmasters include: a. Ability to move positions within individual school budgets throughout the school year as long as there is compliance with state and federal mandates. This can be done by submission of a budget transfer (FA-01) and accompanying explanation to the Budget Office through your community superintendent. b. Use of lag funds within the 312 account at all levels, and within the lunch monitor account at the elementary school level. This can be done beginning immediately by written request to the Budget Office through the community superintendent. c. Return to schools of one-third of what is saved in substitute monies once we have factored out the use of district substitutes or building substitutes. This will be done early enough in the spring to enable principals and headmasters to use any funds saved in the late spring. d. Flexible use of 620 funds to buy equipment, to pay part-time stipends to teachers for special programs for contracted services, for consultants, for tutors, or for hiring temporary help during peak periods. Use of 620 funds in this manner will be by submission of the appropriate FA-01 and explanation to the Budget Office through the community superintendent. (It should be noted that 620 funds cannot be used for creating extra permanent positions, whether full- or part-time.) e. Pooling of resources between schools. Savings that accrue to an individual school may prove small but pooling resources among several facilities might offer opportunities that otherwise were not possible. For example, two or three small schools might find it possible to purchase jointly audio/visual equipment that none could buy individually. In fact, smaller schools are most likely to obtain maximum benefits from these proposals only if they do cooperate and dovetail their efforts with each other. It is my belief that this initial movement toward providing flexibility while small at first, will enable school principals and headmasters to purchase some important materials and to try some innovative approaches. It will also allow us as a system to test out ways to provide budget flexibility in a more comprehensive manner in the future. I will be discussing this topic with principals and headmasters as I meet with you by level, and, along with the Budget Director, I will be available for any inquiries or recommendations. Thank you for your continued cooperation. cc: Superintendent Community Superintendents Budget Director CURRENT BUDGET ------------- RESERVED --------- ENCUMBERED ---------- EXPENDED --------- ADJUSTMENTS ----------- PCT YTD ------ AVLBLE BUDGET ----------- SELECTED ACCOUNT 87-87-012-***-*** - DISTRICT C/E 1,950,786 2,417 22,663 209,570 12 1,716,134 __________________________________________________________________________________________________________________ 131 REG. EDUCATION TCHR 690,289 58,151 8 632,137 133 PER DIEM SUBS 32,340 32,340 __________________________________________________________________________________________________________________ 141 KDG TEACHER 121,752 9,214 7 112,537 161 BILINGUAL KDG TCHR 22,180 2,272 10 19,907 171 SPED RESOURCE TCHR 94,146 6,225 6 87,920 __________________________________________________________________________________________________________________ 181 SPED SUB/SEP. TCHR 245,174 19,721 8 225,452 191 BILINGUAL TEACHER 202,642 17,893 8 184,748 312 SCH/DIST. ADMINIS. 123,714 30,629 24 93,084 __________________________________________________________________________________________________________________ 341 PROGRAM SUPPORT 32,777 3,300 10 29,476 381 ATHLETIC INSTRUC. 24,976 2,272 9 22,703 391 P.T. PROF/STIPEND 588 588 __________________________________________________________________________________________________________________ 521 CUSTODIAN 157,341 35,919 22 121,421 576 LUNCH MONITOR 24,486 858 3 23,627 577 BUS MONITOR 4,236 4,236 __________________________________________________________________________________________________________________ 578 INSTRUCTIONAL AIDE 8,482 8,482 586 SPED RESOURCE AIDE 9,282 9,282 587 SPED SUB/SEP. AIDE 64,972 2,037 3 62,934 __________________________________________________________________________________________________________________ 588 BILINGUAL ED. AIDE 30,809 564 1 30,244 620 INSTRUC. SUPPLIES 58,850 1,432 21,909 20,507 74 14,999 730 RPRS/MAINT. B&G __________________________________________________________________________________________________________________ 810 INSTR. EQUIPMENT 1,750 985 753 99 11 820 NON-INSTR. EQUIP. EXP OBJ ACCOUNT DESCRIPTION --------------------------------- 012 GSP/CITY FUNDS BOSTON PUBLIC SCHOOLS Exhibit 2. School Expenditure Report HBSP Product Number TCG249 THE CRIMSON PRESS CURRICULUM CENTER THE CRIMSON GROUP, INC. Granville Symphony Orchestra, Inc. If it weren't for the special fund drive in conjunction with our 100th Anniversary, this would have been our fifth year in a row with a deficit. Even with the fund drive, the total deficit for the last five years has totaled well over $4 million, which we've had to withdraw from capital funds. If we continue this way, our capital funds will soon be exhausted. The speaker was William Johnson, Chair of the Board of Trustees of the Granville Symphony Orchestra (GSO). He continued: We've got to stop the hemorrhaging. Our plan is to put in place a series of measures that will both help us out on the revenue side and keep our expenses in check. We've outlined that plan in our most recent annual report, and I'm sure the board and staff are committed to it, but I'm not completely convinced that it's attainable. BACKGROUND GSO owned two properties. One was Concert Hall in Granville. The orchestra performed there, except in the summer and when it performed in other cities. When Concert Hall was not needed for performances, rehearsals, or recording sessions, it often was rented to other organizations. The other property was Greenwood, a large complex in the Beaumont Hills, about 130 miles from Granville. The orchestra performed there for nine weeks in the summer. Several hundred students participated in training programs at Greenwood each summer. (The principal buildings at Greenwood were not winterized and could be used only in the summer.) In the summer of 2012, attendance at Greenwood totaled 308,000. In 2011-12, in addition to Greenwood, the orchestra gave 107 concerts, of which 13 were in foreign countries and 14 in other American cities. The Granville Players Orchestra, formed from symphony orchestra players, gave 63 concerts in Concert Hall and 7 free concerts at an outdoor concert shell in Granville, known as the Terrace. Nearly all orchestra and Players performances were sold out. Management estimated that Concert Hall was used on 165 evenings a year, of which 130 were for GSO concerts and rehearsals, and 35 were for rentals to outside groups. In the afternoons there were 22 symphony orchestra concerts and approximately 25 rentals to outside groups. The orchestra used the hall on 125 to 150 afternoons annually for rehearsals, recording, or television sessions. PROPOSED PLAN The \"GSO/100\" fund drive raised about $20 million of capital funds (primarily endowment) over a five-year period. Management recognized, however, that the special stimulus of the 100th Anniversary would not provide the funds needed to balance the budget in the future. Alternative ways of financing operations were discussed, and the trustees eventually agreed on the plan given in Exhibit 1. In the GSO annual report for 2012 (i.e., for the fiscal year ended August 31, 2012), this plan was described as follows: As the orchestra embarks on the first decade of its second century, Trustees, Overseers, and Friends must make plans based upon the experience of the past and their best estimate of the economic climate in the years ahead. The single most important assumption in making such a projection is the rate at which \"fixed costs\" of maintaining the present organization and properties will increase due to inflation. Included in the Analysis of Revenue Contribution to Fixed Costs are projections based upon several assumptions: _____________________________________________________________________________________________ This case was prepared by the late Professor Robert N. Anthony, and Professor David W. Young. It is intended as a basis for class discussion and not to illustrate either effective or ineffective handling of an administrative situation. Copyright 2012 by The Crimson Group, Inc. To order copies or request permission to reproduce this document, contact Harvard Business Publications (http://hbsp.harvard.edu/). Under provisions of United States and international copyright laws, no part of this document may be reproduced, stored, or transmitted in any form or by any means without written permission from The Crimson Group (www.thecrimsongroup.org) TCG249 Granville Symphony Orchestra, Inc. 2 of 5 _____________________________________________________________________________________________ 1. That \"fixed costs\" will increase at a compound annual rate of approximately 7 percent through fiscal 2019-2020. 2. That management will be able to increase the percentage of \"fixed costs\" financed by concert activities by 1/2 of 1 percent per year. 3. That the Investment Committee and the Resources Committee working together will be able to increase the percentage of \"fixed costs\" covered by endowment income by 1/2 of 1 percent per year. 4. That the Resources Committee will be able to raise on average about $6,000,000 per year, of which $2,000,000 per year will be available to balance the budget. 5. That the Buildings and Grounds Committee will be able to limit capital expenditures for depreciation, for necessary improvements, and for new facilities to $500,000 per year. Perhaps the most significant conclusions to draw from the projections [Exhibit 1] are: 1. That, in the absence of some new source of revenue, ticket prices will have to continue to increase so that the marginal contribution from concert activities can increase from $5,709,000 in 2011-2012 to $10,500,000, or 64.5 percent of \"fixed costs,\" in 2019-2020. 2. That Endowment Income available for unrestricted use must increase from $1,893,000 in 2011-2012 to $4,000,000, or 24.5 percent of \"fixed costs,\" in 2019-2020 . 3. That the book value of Pooled Investments must be increased from $19,465,000 at August 31, 2012, to $47,500,000 in 2020 if the yield on endowment funds averages slightly over 8 percent over the period. During the past five years the orchestra raised a total of $20,000,000 for GSO/100 and $7,000,000 from Annual Fund Drives for a grand total of $27,000,000. Thus, the goal of $6,000,000 per year, or $30,000,000 over the next five years, is challenging, but the task is not much greater than the task already accomplished during the period of the GSO/100 campaign, and the organization is in place to do the job. The financial projections in the Analysis of Revenue Contribution to Fixed Costs and the above assumptions and conclusions will have to be reexamined annually in the light of economic conditions and the financial results of each year's operations, but the nature of the task facing management and volunteer fund raisers will probably not be materially changed by modest differences from the assumptions. Contribution to Fixed Costs The concept of \"contributions to fixed costs\" referred to in the above description was explained in the Annual Report as follows: Each year the Trustees are faced with certain relatively fixed costs which are scheduled in the Analysis of Revenue Contribution to Fixed Costs report. These are primarily for the annual compensation of orchestra members, the general administration of the orchestra, and the basic costs of maintaining Concert Hall and Greenwood. Management earns a percentage of these \"fixed costs\" by presenting concert programs, through radio, television, and recordings, and through other projects which involve both direct expenses and related income from ticket sales, fees, and royalties. Each program or activity, of which there are over 40, is expected to make a \"marginal contribution\" to \"fixed costs.\" The \"marginal contribution\" is the difference between direct income and direct costs of the particular program or activity. The orchestra continued to make progress toward its goal of increasing the percentage of \"fixed costs\" contributed from operation activities. The \"marginal contribution\" from all operations in 2011-2012 covered 62.3 percent of \"fixed costs\" as compared to 59.7 percent last year and 52.4 percent in 2007-2008. In fiscal 2011-2012, the \"fixed costs\" amounted to $9,160,000, compared to $8,434,000 in 2010-2011, an increase of 8.6 percent. Operations earned $5,709,000, compared to $5,031,000 last year, a 13.1 percent increase. This left an \"operating deficit\" to be funded from other sources, e.g., endowment income and unrestricted contributions, of $3,451,000 in 2011-2012, compared to $3,403,000 last year. TCG249 Granville Symphony Orchestra, Inc. 3 of 5 _____________________________________________________________________________________________ Other Information The 2012 Annual Report contained the following explanation of endowment income: Investment Income reached an all-time high of $2,134,000 as compared to $1,838,000 in the prior year. Of this amount, $219,000 was used for restricted purposes, e.g. supporting the winter season programs ($35,000), providing fellowships for the Beaumont Music Center and other BMC activities ($101,000), supporting the Terrace concerts ($47,000), underwriting the Prelude Series ($29,000), and other miscellaneous activities. An additional $22,000 went to non-operational uses, leaving $1,893,000 for unrestricted use in support of operations. This compares to $1,690,000 in 2010-11, a 12 percent increase. The Annual Report also explained how the budget for 2012 was balanced, as follows: The percentage of \"fixed costs\" that had to be provided by unrestricted gifts was reduced from 20.3 percent in 2010-11 to 17.0 percent in 2011-12, amounting to $1,558,000. The sources of the $1,558,000 required to balance revenues and expenses in 2011-12 were: 1. Annual Fund (net): $989,000, up $250,000 or 34 percent over the previous year. 2. Projects (net): $723,000, up $459,000 or 174 percent over the previous year. Since funds available from these two sources totaled $1,712,000, it was possible to transfer the excess gifts of $154,000 for other needs. Exhibit 2 gives the balance sheet, taken from the Annual Report. Assignment 1. What is the strategy of the GSO? Please be as specific as you can in identifying both the GSO's environmental constraints, and how it differs both from other symphony orchestras, and from a professional sports team, which has many similar constraints and objectives? Why do these differences exist? 2. Reconstruct Exhibit 1 into a more traditional operating statement. What does this tell you about how well the GSO is achieving the strategy you identified in Question 1? What additional financial information would you like to have in making this assessment? 3. How has the GSO managed its financial affairs over the past five years? What criteria did you use in making this assessment? 4. Do the plans for 2013-2020 seem attainable? If so, why? If not, what changes would you propose. 1,579 25.5% (1,369) 22.1% Pooled investments: Cost Market Endowment share unit value 10,343 11,645 12.54 493 980 13,850 15,817 13.67 358 621 12,018 14,015 13.20 1,433 (1,075) 2,116 28.4% (1,075) 14.4% (268) 943 229 1,172 (414) 758 10.2% 1,211 3,161 160 510 289 186 (87) 32 4,251 57.1% (3,191) 42.9% 1,358 18.2% 4,514 1,160 1,768 7,442 Actual 2010 1,750 (1,129) 1,808 26.9% (1,129) 16.8% (302) 819 209 1,028 (441) 587 8.7% (162) 971 176 1,147 (549) 598 9.6% Capital analysis: Added to endowment funds 442 Funding of deficit (1,369) Net change in endowment fund (927) Contributions for plant additions 433 Total endowment income and annual fund-raising Percent fixed costs Surplus (deficit) Percent fixed costs Fund-raising expenses Total Percent fixed costs 1,121 2,986 145 384 225 91 (60) 12 3,783 56.3% (2,937) 43.7% 1,221 18.2% 4,243 1,005 1,472 6,720 2009 1,133 2,666 125 320 139 101 (100) 0 3,251 52.4% (2,948) 47.6% 981 15.8% Results from operations: Operations: Concerts Radio (BSTT) Recording Television Occupancies Education Other Income Marginal contribution Percent fixed costs Operating (deficit) Percent fixed costs Endowment Income: Percent fixed costs Annual fund-raising: Total annual gifts Special-purpose gifts transferred to operations General-purpose gifts Net project revenues 3,902 920 1,377 6,199 Fixed costs: Artistic Facilities Administration Total fixed costs 2008 15,822 16,356 13.78 1,641 342 1,308 (966) 2,437 28.9% (966) 11.5% (299) 1,035 264 1,299 (553) 746 8.8% 1,334 3,827 185 543 223 252 (34) 35 5,031 59.7% (3,403) 40.3% 1,691 20.0% 5,176 1,318 1,940 8,434 2011 19,465 20,536 14.19 367 3,709 3,709 3,605 39.4% 154 -1.7% (355) 1,431 723 2,154 (442) 1,712 18.7% 1,786 4,006 185 827 246 244 (77) 278 5,709 62.3% (3,451) 37.7% 1,893 20.7% 5,608 1,348 2,204 9,160 2012 23,000 1,021 3,385 3,500 (115) 3,865 38.1% (115) 1.1% 6,160 60.7% (3,980) 39.3% 10,140 2013 26,500 500 3,500 4,175 38.5% 0 6,675 61.5% (4,175) 38.5% 10,850 2014 30,000 500 3,500 4,475 37.9% 0 7,325 62.1% (4,475) 37.9% 11,800 2015 GRANVILLE SYMPHONY ORCHESTRA, INC. Exhibit 1. Analysis of Revenue Contribution to Fixed Costs For the Year Ended August 31 (In $000) 33,500 500 3,500 4,650 37.4% 0 7,775 62.6% (4,650) 37.4% 12,425 37,000 500 3,500 4,925 37.0% 0 8,375 63.0% (4,925) 37.0% 13,300 Projections 2016 2017 40,500 500 3,500 5,200 36.6% 0 9,025 63.4% (5,200) 36.6% 14,225 2018 44,000 500 3,500 5,475 36.0% 0 9,750 64.0% (5,475) 36.0% 15,225 2019 47,500 500 3,500 5,800 35.6% 0 10,500 64.4% (5,800) 35.6% 16,300 2020 2012 Cash management fund-annuities Real estate and other property held for sale Pooled investments at market Less participation in pooled investments by other funds Total assets Liabilities and Fund Balances Total liabilities and net assets (1,681,781) $15,716,067 (1,979,960) $19,388,682 Total liabilities and net assets Permanently Restricted Fund 179,390 Annuity payable 862,233 16,356,225 Net assets 4,693,885 506,858 $ 10,664,101 Unrestricted Fund Accounts payable $ 501,962 Accrued expenses and other 1,666,222 liabilities 1,681,781 Advanced ticket sales and other receipts Advance receipts--special events 1,228,087 Total current liabilities 345,195 Accrued pension liability 5,423,247 Total liabilities 40,111 Net assets 2011 120,409 712,223 20,536,010 Cash (including savings accounts of $49,835 in 2012 and $463,320 in 2011 $ 119,888 Short-term cash investments 2,600,000 Participation in pooled investments, at market 1,979,960 Accounts receivable--less allowance for doubtful accounts of $10,000 in 2012 and $32,000 in 2011 994,969 Prepaid salaries and wages 343,962 Total current assets 6,038,779 Deferred charges 163,893 Properties and equipment at cost, less accumulated depreciation of $2,209,622 in 2012 and $1,956,005 in 2011 4,766,216 Prepayments and other assets 251,077 Total assets $ 11,219,965 Assets GRANVILLE SYMPHONY ORCHESTRA, INC. Exhibit 2. Balance Sheets August 31, 2012 and 2011 2,516,114 803,015 $ 4,100,660 187,775 $ 4,288,435 6,375,666 2,781,005 137,983 $ 4,102,673 221,116 $ 4,323,789 6,896,176 $ 15,716,067 15,612,405 19,320,904 $ 19,388,682 $ 103,662 $ 67,778 $ 10,664,101 189,972 619,008 $ 11,219,965 $ 591,559 2011 $ 564,677 2012 HBSP Product Number TCG 211 THE CRIMSON PRESS CURRICULUM CENTER THE CRIMSON GROUP, INC. Harbor City Community Center Our deficit is increasing, and we obviously have to reverse that trend if we're going to become solvent. But, for that, we have to know where our costs are, in particular the cost of each of the services we offer. In March, Liz Conaway, Executive Director of the Harbor City Community Center, expressed concern to Ted Roberts, her new accountant, about the Center's cost accounting system. The extensive funding Harbor City had received during its early years was decreasing and Ms. Conaway wanted to prepare the Center to be self sufficient, yet she lacked critical cost information. BACKGROUND Harbor City Community Center had been established 20 years ago by a consortium of community groups. Situated in Torrance, an inner-city residential neighborhood of Los Angeles, California, the Center provided comprehensive services to residents of Torrance and neighboring communities. It continued to maintain strong ties with the community groups responsible for its development and subsequent acceptance in Torrance. Funding of Harbor City was initially provided by the Federal government as part of an attempt to provide broad based community services to inner-city poverty areas in the United States. Two years ago, the city of Torrance supplemented Harbor City's revenue with a small three-year grant. Because Ms. Conaway realized that foundation and government support could not continue indefinitely, she intended to make the Center self-sufficient as soon as possible. Harbor City's income statement is contained in Exhibit 1. The Center was composed of eight client-service departments: Homemaker Service, Family Planning, Counseling, Parents' Advocacy, Mental Health, Alcohol Rehabilitation, Community Outreach, and Referral and Placement. In addition, the center had a Training and Education Department. The center had 22 paid employees and a volunteer staff of 6-10 students acquiring clinical and managerial experience. Community Outreach, which had been designed by Harbor City's consumers, was a multidisciplinary department providing a link between the health and social services at the center and the schools services of the community. The department was staffed by a part-time speech pathologist, a part-time learning specialist, and a full-time nutritionist. The Referral and Placement Service was for clients whom the center felt, at the time it received a referral, it could not serve; the staff tried to locate another agency to serve the client. Parents' Advocacy did not serve clients directly but rather worked on behalf of clients who were having difficulty with housing, schools, and so forth. EXISTING INFORMATION SYSTEM Harbor City's previous accountant had established a system to determine the cost per client-visit (or related activity such as advocacy). According to this method, shown in Exhibit 2, the cost was a yearly average for all client visits. The accountant would first determine the direct cost of each department. He would then add overhead costs, such as administration, rent, and utilities to the total cost of all the departments to determine the community center's total costs. Finally, he would divide the total by the year's number of visits. Increased by an anticipated inflation figure for the following year, this number became the projected cost per visit for the subsequent year. In reviewing this method with Mr. Roberts, Ms. Conaway explained the problems she perceived. She said that although she realized this was not a precise method of determining cost for clients, the center's cost per visit had to be held at a reasonable level in order to keep its services _____________________________________________________________________________________________ This case was prepared by Professor David W. Young. It is intended as a basis for class discussion and not to illustrate either effective or ineffective handling of an administrative situation. Copyright 2012 by The Crimson Group, Inc. To order copies or request permission to reproduce this document, contact Harvard Business Publications (http://hbsp.harvard.edu/). Under provisions of United States and international copyright laws, no part of this document may be reproduced, stored, or transmitted in any form or by any means without written permission from The Crimson Group (www.thecrimsongroup.org) accessible to as many community residents as possible. Additionally, she anticipated complications in determining the cost per visit for each of Harbor City's departments: You have to consider that our overhead costs, like administration and rent, have to be included in the cost per visit. That's easy to do when we have a single cost, but I'm not certain how to go about it when determining costs on a departmental basis. Furthermore, it's important to point out that some of our departments provide services to others. Parents' Advocacy, for example. There are three social workers in that department, all earning the same salary. But one works exclusively for Counseling, while another divides her time evenly between Family Planning and Homemaker Service. Only the third spends his entire time in the Advocacy Department seeing clients who don't need other social services, although he occasionally refers clients to other social workers. In the Alcohol Rehabilitation Department, the situation is more complicated. We have two part-time MSWs, each earning $48,000 a year, and one part-time bachelor degree social worker earning $32,000. The two MSWs yearly see about 1,500 clients who need general social work counseling, but they also spend about 50 percent of their time in other departments. The BA social worker cuts pretty evenly across all departments, except referral and placement of course. Mr. Roberts added a further dimension: I've spent most of my time so far trying to get a handle on allocating these overhead costs to the departments. It's not an easy job, you know. Administration, for example, seems to help everyone about equally, yet I suppose we might say more administrative time is spent in the departments where we pay more salaries. Rent, on the other hand, is pretty easy: it can be done on a square-foot basis. We could classify utilities according to usage if we had meters to measure electricity, phone usage and so forth, but because we don't, we have to do that on a square-foot basis as well. This applies to cleaning, too, I guess. It seems that record keeping can be allocated on the basis of the number of records, and each department generates one record per client visit. Training and Education (T&E) is the most confusing. Some departments don't use it at all, while others use it regularly. I guess the fairest would be to charge for it on an hourly basis. Since there are two people in the department, each working about 2,000 hours a year, the hourly charge would be about $16.00. But this is a bit unfair, since T&E also uses supplies, space and administrative time. So we should include those costs in its hourly rate. Thus, the process is confusing and I haven't really decided how to sort it out. However, I have prepared data on floor space and T&E usage. (Exhibit 3). As Ms. Conaway looked toward the rest of the year, she decided to calculate a precise cost figure for each department. The center was growing, and she estimated that total client volume would increase by about 10 percent during the year, spread evenly over each department. She anticipated that costs would also increase by about 10 percent. She asked Mr. Roberts to prepare a step-down analysis for last year so that she would know Harbor City's costs for each department. She planned to use this information to assist her in projecting costs for the current year. Assignment 1. What is the cost per visit for each department? 2. How might this information be used by Ms. Conaway? HARBOR CITY COMMUNITY CENTER Exhibit 1. Income Statement For the Prior Year (Ended December 31) Revenue from patient fees Other revenue Total revenue Expenses: Program services Record keeping Training & Education General & Administrative Surplus (Deficit) $1,381,800 20,000 $1,401,800 $940,000 40,000 100,000 368,000 1,448,000 ($46,200) _____________________________________________________________________________________________ Harbor City Community Center June 2012 2 of 3 HARBOR CITY COMMUNITY CENTER Exhibit 2. Costs and Patient Visits for the Prior Year, By Department1 Department Homemaker Service Family Planning Counseling Parents' Advocacy Mental Health Alcohol Rehabilitation Community Outreach Referral and Placement Subtotal Administration Rent Utilities Training and Education Cleaning Record keeping Total No. of Visits 5,000 10,000 2,100 4,000 1,400 1,500 2,500 6,400 32,900 Salaries2 $80,000 20,000 120,000 108,000 60,000 128,000 20,000 80,000 616,000 152,000 64,000 28,000 $860,000 Others3 $32,000 60,000 64,000 24,000 32,000 32,000 40,000 40,000 324,000 8,000 144,000 40,000 36,000 24,000 12,000 $588,000 Number of Client Visits Average Cost per Visit Total $112,000 80,000 184,000 132,000 92,000 160,000 60,000 120,000 940,000 160,000 144,000 40,000 100,000 24,000 40,000 $1,448,000 32,900 $44.00 Notes: 1. Client visits rounded to nearest 100; expenses rounded to nearest $1,000. 2. Includes fringe benefits. 3. Materials, supplies, contracted services, depreciation and other non-personnel expenses. Exhibit 3. Floor Space and Training and Education Usage, by Department1 Department Homemaker Service Family Planning Counseling Parents' Advocacy Mental Health Alcohol Rehabilitation Community Outreach Referral and Placement Administration Record keeping Training and Education Total Floor Space2 T & E Usage3 1,000 1,300 1,800 300 1,000 500 1,100 1,000 500 300 1,200 1,000 200 2,400 100 ----100 200 ------- 10,000 4,000 Notes: 1.Rounded to nearest 100 2.In square feet 3.In hours per year rounded to the nearest 100 _____________________________________________________________________________________________ Harbor City Community Center June 2012 3 of 3 HBSP Product Number TCG 115 THE CRIMSON PRESS CURRICULUM CENTER THE CRIMSON GROUP, INC. Lakeside Hospital A hospital just can't afford to operate a department at 50 percent capacity. If we average 20 dialysis patients, it costs us $425 per treatment, and we're only paid $250. If a department can't cover its costs, including a fair share of overhead, it isn't self-sufficient and I don't think we should carry it. Peter Lawrence, M.D., Director of Specialty Services at Lakeside Hospital, was addressing James Newell, M.D., Chief Nephrologist of Lakeside's Renal Division, concerning a change in Medicare's payment policies for hemodialysis treatments. Recently, Medicare had begun paying independent dialysis clinics for standard dialysis treatments, and the change in policy had caused patient volume in Lakeside's dialysis unit to decrease to about 50 percent of capacity, producing a corresponding increase in per-treatment costs. By February of the current fiscal year, Dr. Lawrence and Lakeside's Medical Director were considering closing the hospital's dialysis unit. Dr. Newell, who had been Chief Nephrologist since he'd helped establish the unit, was opposed to closing it. Although he was impressed by the quality of care that independent centers offered, he was convinced that Lakeside's unit was necessary for providing back-up and emergency services for the outpatient centers, as well as for treatment for some of the hospital's seriously ill inpatients. Furthermore, although the unit could not achieve the low costs of the independent centers, he disagreed with Dr. Lawrence's cost figure of $425 per treatment. He resolved to prepare his own cost analysis for their next meeting. BACKGROUND Approximately twenty years ago, at Dr. Newell's initiative, Lakeside had opened the dialysis unit, largely in response to the growing number of patients with chronic kidney disease. The hospital's renal division had long provided acute renal failure care and kidney transplants, but the the most common treatment for end-stage renal disease was hemodialysis. During dialysis, a portion of a patient's blood circulates through an artificial kidney machine and is cleansed of waste products. Used three times a week for 4 to 5 hours, the kidney machine allows people with chronic kidney disease to lead almost normal lives. The dialysis unit had 14 artificial kidney machines. Because of space limitations, they used only 10 at any one time, reserving the other four for breakdowns and emergencies. Open six days a week with two shifts of patients daily, the unit could provide 120 treatments a week, which meant they could accommodate 40 regular patients. From 1973, the year that Medicare began reimbursing for dialysis, all dialysis patients at Lakeside had been covered by Medicare. Until recently, the unit had operated at almost 100 percent capacity, even extending its hours to accept emergency cases and to avoid turning away patients. Patients typically spent their first three months of dialysis in a hospital facility. If there were no complications when this \"start-up\" period had passed, they were then required to transfer to an independent center. Most independent dialysis centers were centrally owned and operated, and were organized into satellite groups spread throughout urban and suburban areas. The facilities were modern and attractively designed and, because they were separate from hospitals' institutional environments, they offered psychological advantages to patients. Centrally managed with low overhead, they could achieve economies unobtainable by similar hospital units. Supplies and equipment were purchased in bulk, for example, and administrators watched staff scheduling and other costs closely. As a result, their per treatment costs were significantly lower than those in a hospital facility. For example, a treatment in a center operating at 100 percent capacity with 40 patients could cost as little as $160. _____________________________________________________________________________________________ This case was prepared by Professor David W. Young. It is intended as a basis for class discussion and not to illustrate either effective or ineffective handling of an administrative situation. Copyright 2012 by The Crimson Group, Inc. To order copies or request permission to reproduce this document, contact Harvard Business Publications (http://hbsp.harvard.edu/). Under provisions of United States and international copyright laws, no part of this document may be reproduced, stored, or transmitted in any form or by any means without written permission from The Crimson Group (www.thecrimsongroup.org) LAKESIDE DATA Lakeside's direct and allocated costs for the Renal Dialysis Unit in the previous fiscal year are detailed in Exhibit 1. Dr. Newell also obtained the unit's cost center report for the same fiscal year (Exhibit 2), which provided a breakdown of the unit's direct costs. Dr. Newell intended to use the prior year's costs to calculate the per-treatment cost at various volume levels for the current year. He also wanted to find the point at which the unit's revenue would meet its costs. He commented: I plan to use only those costs that can be traced directly to dialysis treatments, and not any overhead costs. If the unit's revenue meets its direct costs, it is self-sufficient. Peter's treatment cost of $425 is misleading since it includes substantial overhead, and this year's overhead will differ from last year's because of the unit's decrease in volume. Also, even though this year's overhead can't be calculated until the end of the fiscal year, I think I can come up with an estimate. First, though, I plan to calculate the \"real\" cost of a treatment and, from there, define a \"fair share\" of overhead. In reviewing the cost center report, Dr. Newell realized that the nature of the costs varied. There are three types of costs I need to consider in this analysis: those that vary in proportion to volume, those that vary with significant changes in volume, and those that remain the same regardless of the unit's volume. The first and the last are pretty clear. Medical supplies, purchased laboratory services, and water usage all change according to the number of treatments provided. The other non-personnel expenses will stay essentially the same regardless of the number of treatments. Salary and wages, and employee expense costs are more complicated. Although they didn't change during the last year, the unit's number of treatments also remained fairly steady. However, the significant reduction in volume this year might cause a corresponding reduction in salary and employee expenses. Last year, we employed seven hemodialysis technicians, seven nurses, and one administrator (our nephrologists are all on the hospitals' physicians' payroll). However, since I had anticipated that volume would fall, I didn't replace the nurse and two technicians who left in January of this year. So, as of February, our annualized salaries have decreased by $84,000 and our fringe benefits have decreased by $8,400, for a total of $92,400. Finally, just as a precaution, in case Peter asks, I had my secretary call a hospital equipment supply manufacturer to discuss the resale value of our 14 machines. They told her that machines used for four years or more could not be sold, even for scrap. We purchased all 14 machines five years ago for $210,000. Assignment 1. What is the breakeven volume for the dialysis unit? What assumptions are necessary for calculating it? 2. What is a fair share of overhead at the current level of activity in the unit? 3. What will happen to total costs and revenues at Lakeside if the dialysis unit is closed? What other options are available and what are their financial consequences? 4. What should Dr. Newell do? 5. What should Dr. Lawrence do? _________________________________________________________