The table below lists the NBA's Toronto Raptors' costs and revenues related to its win percentage (i.e. the team's on court success). Total Player Payroll is the primary driver of the team's cost structure. Furthermore, Total Player Payroll is mainly a function of the number of star players the team decides to employ. Revenues are generated through a combination of TV revenue (both from the NBA from the national TV contracts in the US and the team's own local TV contracts with TSN and Rogers) and in-stadium revenue from ticket and ancillary revenue from fans coming to home games at the Air Canada Centre.

It should also be noted the NBA employs both a 'salary cap' and a 'luxury tax' to limit teams' ability to spend on player payroll. The current NBA salary cap is at $94M. However, the NBA has a 'soft' salary cap which allows teams to exceed the salary cap limit up to the luxury tax threshold of $113M. For every dollar in player payroll greater than $113M, teams will pay a penalty, or a tax, to the league office based on the following amounts:

• $0 - $5M greater than the threshold: $1.50 tax per $1 payroll;
• $5M - $10M greater than the threshold: $1.75 tax per $1 payroll;
• $10M - $15M greater than the threshold: $2.50 tax per $1 payroll; and
• > $15M over the threshold: $3.25 tax per $1 payroll.

Use the above to answer the following questions. You are the president of the Toronto Raptors. Your management philosophy is to maximize…

a) Win percentage regardless of the financial impact on the organization. Given this, what number of star players will you direct General Manager Masai Ujiri to hire? Why? What is the Raptor's profit or loss in this scenario? Hint: make sure to include the impact of the luxury tax on the team's financial situation.

b) Win percentage while ensuring making a positive profit for the team's ownership. Given this, what number of star players will you direct General Manager Masai Ujiri to hire? Why? What is the Raptor's profit or loss in this scenario?

c) Profits for the team's ownership by hiring the amount of star players the team's fans are willing to pay for. Given this, what number of star players will you direct General Manager Masai Ujiri to hire? Why? What is the Raptor's profit or loss in this scenario?

Toronto Raptors Revenue, Costs and Win Percentage (%) Costs ($M) Star Players # of Players Total Player Payroll Other Total MC 24 20 44 44 26 20 46 2 34 20 54 8 51 20 71 17 72 20 92 21 94 20 114 22 120 20 140 26 150 20 170 30 184 20 204 34 222 20 242 38 264 20 284 42 310 20 330 46 360 20 380 50 0 1 2 3 4 5 6 69 8 9 10 11 12 Revenues and Profits TR (SM) 30 52 72 90 106 120 132 142 150 156 160 162 162 MR (SM) Profit ($M) 30 22 20 18 16 14 12 10 8 6 4 20 (14) 6 18 19 14 6 (8) (28) (54) (86) (124) (168) (218) Win % 0.200 0.300 0.375 0.450 0.500 0.550 0.600 0.635 0.660 0.680 0.700 0.715 0.725