OPTION A

McBain Tower

In this scenario, the business would exercise the option of breaking its current lease for a penalty of $300,000. It would then relocate to a five-story space within McBain Tower. Since most of the space is already designed well for training, All-Star could make quick tweaks at an estimated cost of $150,000 and get things rolling very quickly. The lease would be a bit costlier- $300,000 a month, and the business would now need to incur added expenses of $50,000 a month for utilities. Don wants your help with projecting the other expenses. On the bright side, the business would now have sixteen rooms to work with (average size of 25 seats each). Shelly admittedly hasn't done much number crunching but believes she can boost enrollment by 25% if the marketing budget is increased by $300,000 to advertise the new larger location. Without the larger budget, she estimates that customer numbers would grow by 15% next year.

OPTION B.

BC Place

With this option, All-Star would rent BC Place stadium on Tuesday and Wednesday afternoons (for ten weeks of the year), at a cost of $10,000 per afternoon (four hours). Since the large stadium has two ends, All-Star would run two three-hour workshops simultaneously and leave enough time for set-up and clean-up. Don envisions each of the two workshops having 150 customers each. The set-up, clean-up, and other costs (beyond rent) would be $1,000 a week. Since enrollment fees for each workshop total $150, Don believes that there would be more than enough revenue to cover the new expenses. Shelly believes that only a small marketing budget increase would be needed with the BC Place arrangement- $150,000 more would be sufficient to recruit an extra 5,000 workshop registrants. Due to the visibility and prestige of BC Place (as well as his familiarity and love for the current location), Don personally prefers Option B. However, he does admit that there is another piece needed to maximize the benefit of BC Place. A certain number of customers would need to be shuttled between BC Place and the permanent office if they are going to be able to attend courses or events at both locations on the same day. Hence, the business will need to buy or rent a large bus- this is something that management is considering anyway (for free morning and evening routes around the city to help customers out), even without the expansion to BC Place. If All-Star was to purchase the 50 -seat bus and use it solely for shuttling between the office and BC Place, it would have the following expected costs: Figure 1. Bus cost Cost of bus, current $300,000 Driver salary, weekly $600 Repairs and Maintenance, weekly $200 Cleaning costs, weekly $300 Fuel costs, weekly $400 Insurance costs, annual $2,500 Expected sale price, 4 years later $200,000 Alternatively, renting the bus would cost $800 per afternoon (all expenses included). To purchase the bus, it is unclear if All-Star would pay cash or borrow the money from the bank at a 5% rate (the business has already negotiated a sizeable line-of-credit to borrow at this rate for any of its business ventures). Don wants a pros and cons analysis of buying or renting the bus, as well as the benefits and drawbacks of using the company's own cash to purchase an asset, or borrowing to do so. He also wants an idea of how the purchase of a big asset such as a bus would be accounted for. Finally, Don does not come from an accounting/finance background and wants some advice on evaluating performance using budgetary analysis. He asks, "For example, if all the 2023 revenues expenses which are shown in Figure 1- what if the budget for all those numbers was 3% higher? Can you show me an example of how a budgetary analysis would look like? Can you please make sure you tell me what is good or bad? Also, how would I go about evaluating our employees fairly on their performance? Not just with budget but maybe in other ways, too? Questions 1. Perform incremental analysis on option A and Option B. 2. Within option B, include the rental analysis or buy the bus