Question #2

Galaxy Science centre (GSC), a nonprofit organizati

on, was founded in late 1999 as the first

science museum to serve the city of Britannia. GSC

's initial construction and start-up 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 10

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 centre

for the municipality, and 4) to operate on

a breakeven 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 2001. Initially, GSC's services will include

various scientific exhibits and education films. T

he annual science fair will include a contest

where science projects entered by students are to b

e judged and the best three exhibited at

GSC. Future plans include adding a gift shop featuring

souvenirs of both the science centre

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 what performance measures

are possible and what criteria

should be used in selecting those measures.

2. Operating revenues and expenses, and setting an

appropriate admission price for the

first year. Given GSC's mandate, the only source o

f 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 t

hat data resulting from an initial

market study and cost analysis (see Exhibit 1) be

analyzed and an admission price for

the first year of operations be recommended.

Required

As Edythe Plum, CMA, the independent consultant hir

ed by GSC's board of trustees, analyze

the two issues and prepare a report, complete with

recommendations, the GSC's board of

trustees.

EXHIBIT 1

Galaxy Science Centr

Expected Admission Levels and Operating Cost Data

At the request of the municipality, GSC has agreed

to admit senior citizens and preschool

children free of charge during the first year of

operations. To compensate GSC, the municipality

reluctantly granted a one-time subsidy of $1,000,00

0 for GSC's first year of operations. GSC

must find an adult admission price for the first year

which would be sufficient to cover operating

costs in excess of the subsidy. GSC would be paid

full adult admission up to $6.00 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

distribution 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 Probability

950,000 to 1,050,000 .10

1,050,001 to 1,150,000 .25

1,150,001 to 1,250,000 .40

1,250,001 to 1,350,000 .15

1,350,001 to 1,450,000 .10

It was estimated that 20% of the admissions would b

e 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:

Total Number of Admissions Total Operating Costs

500,000 $ 6,080,000

1,000,000 6,390,000

1,500,000 6,700,000

(This analysis assumes linear cost behavior within

the relevant range.)