Provide Working Notes!

Q). The board of governors of the Bullstrode Museum of Fine Arts, concerned about cutbacks to its operating grant from the provincial government, is considering a proposal from its executive director that would, if successful, make the museum less dependent on government financing. The proposal involves devoting a section of the museum's art restoration workshop that is not currently being used to the production of miniature copies of the most renowned piece of sculpture in its collection, Koppelheim's The Hug. These reproductions would then be sold in the museum's retail shop to contribute toward the museum's revenues. Expected unit costs have been estimated by an industrial engineer as follows: Direct materials (plaster, wood, paint) Direct labour Other variable costs (including selling) $20.00 $10.00 $5.00 In addition, there would be fixed costs of $140,000 per annum related to this operation. The engineer further estimates that such an operation could produce a maximum of 10,000 units a year. The museum hopes that after accounting for all costs, it could generate around $50,000 a year from this activity. The members of the board, however, are somewhat concerned about the risks involved, especially the $140,000 in fixed costs (i.e., the depreciation on specialized machinery). This is the direct consequence of a capital expenditure of $700,000 that would be committed at the beginning of year one. One board member asked, "Where are we if this project fails in the first year?" Finally, nobody has yet given serious thought to how the sculpture will be priced when it goes on sale in the museum shop. Required a) If the price of the sculpture were set at $70, what volume would have to be achieved to break even? What volume to make an annual contribution of $50,000 to museum revenues? b) If the price of the sculpture were set at $50, what volume would have to be achieved to break even? To make a contribution of $50,000 to museum revenues? c) Advise the board on this proposal. Should the museum go ahead with the project or not? Indicate what additional information you would need to be able to give better advice