Case Analysis : Taos Museum of Southwestern Arts and CraftsHere first of all, Taos Museum of Southwestern Arts and Crafts (TMSAC) is a fictional non-for-profit organization and like any other not-for-profit organization the calculation of Break Even-Point is very crucial. Break Even-Point is a concept of absorption costing where both fixed and variable cost of an entity is necessary for profitability analysis. Break-Even-Point is a situation in an organization when there is neither loss nor profit for an organization. Here no profit and loss says that the accumulated contribution margin of the entity is exactly the same of the amount of fixed cost, or where Revenue = Expenses. Break-Even-Point can either be expressed on a unit basis or in a monetary basis, but it signifies an activity level. There are some assumptions in Break Even-Point analysis as well i.e., (i) The Sales price and Variable costs per unit therefore the contribution margin per unit is known and fixed throughout the relevant period/ fiscal period. (ii) Fixed costs are not subject to change within the relevant range and time value of money is not considered (iii) The quantity of goods produced is equal to the amount of goods sold (iv) In a multiproduct Industry the amounts of goods of each type produced and sold are fixed. We need Break-Even-Point to calculate the Margin of Safety and also in the calculation of various types of risks or leverage and COST-Volume-Profit analysis. The simple calculation of Break Even-Point is shown below for the facilitation of further analysis in the Case.We know that in a Break Even-Point : Total Revenue(TR) = Total Cost (TC)=> Sales price per unit X Sold Unit = Total Fixed Costs + Total Variable Costs => Sales price per unit (P) X Sold Unit (U) = Total Fixed Costs + Per unit variable costs(PVC) X Sold Units(U) Or, Mathematically , P X U = TFC + PVC X UOr, P X U - PVC X U = TFCOr, U (P-PVC) = TFCOr, U = Here (P-PVC) is the per unit contribution margin. Denoted by CMU Therefore Break-Even-Point in units is U = Or, U = If a portion of TFC i.e., TFC is received as revenue without variable costs then we consider TFC-TFC as the portion to be met up by the CMU.

Solution to Problem 1 Here, Total Revenues = Grants revenue + Annual Memberships revenue + Visitor revenue Here, Average price of visitors ticket is calculated : There are Four groups of visitors and their respective ticket prices are Types of visitorPercent Of TotalPrice

Regular65%$6.00

Group15%$3.00

Senior Citizen10%$2.00

Student10%$1.00

= X 100

= X 100= $ 4.65 on average per visitor

Calculation of Variable costs per visitor : Handouts Costs Per visitor 0.550 Electric Costs Per Visitor 0.150* Tape Costs Per visitor X 30% (1.25 X .30)0.375 1.0750

Average Variable costs per Visitor *(As on average 30% of the visitors avail of the tape offer) Calculations of Fixed Costs Shortfall (TFC-TFC') for the year 1999 :Grants revenue $ 564,000.00Annual Memberships Revenue (Expected Number of supporting members X Donated amounts) (1,255 X 112.75) 141,501.25705,501.25

Here Fixed Cost = $ 985,000 Therefore shortfall in meeting up the Fixed cost with total contribution margin = Fixed cost Grants Revenue - Annual Membership Revenue = $ 985,000 - 564,000 - 141501.25 = 279498.75This shortfall against the fixed costs must be met with the Visitors revenue to achieve Break-Even-Point. Therefore BEP in units/Visitors U = = = 78181.46853 Units/ Visitors 78182 Units / Visitors Therefore We will say to the Director of the Museum that the minimum number of visitors that must come to the Taos Museum Of Southwestern Arts and Crafts (TMSAC) to Break Even is 78,182 .

Solution to Problem 2As the revenues from Grants, Membership and visitors come in an uneven manner , therefore having a 80,000 visitors per year according to marketing forecasts and opening a profitable shop established in the first day of second quarter will not lead to net profit for the museum in each of the quarter but profit will occur certainly in the overall year summarized, and We will probably have some Margin of Safety.

Quarterly Budget of Revenues, Support and ExpensesHeads 1st Quarter 2nd Quarter

Revenues :

Visitors Revenue55,80093,000

Membership Revenue56600.5 28300.25

Grant Revenue141,000282,000

Shop Sales Revenue -40,000

Total Revenue253,400.50443,300.25

Costs :

Fixed Costs246,250246,250

Variable costs12,900 47,500

Total Costs259,150.00293,750

Surplus/(Deficit) (5749.50)149550.25

For The Quarters ended in 30th April and 30 June 1999 (Absorption Costing Format)

Quarterly Budget of Revenues, Support and ExpensesFor The Quarters ended in 30th September and 31 December 1999 (Absorption Costing Format) Heads3rd Quarter 4th Quarter

Revenues :

Visitors Revenue167,40055,800

Membership Revenue28300.2528300.25

Grant Revenue56,40084,600

Shop Sales Revenue72,000 24,000

Total Revenue324,100.25192,700.25

Costs :

Fixed Costs246,250246,250

Variable costs85,500 28,500

Total Costs331,750274,750

Surplus/(Deficit)(7649.75)(82049.75)

Calculations :(1) Visitors Revenue Per quarter = Total Number of Visitors throughout the year estimated X Percentage of Visitors visit during the quarter X Average per visitor price of ticket Q1 : 80000 X 15% X $4.65 = $ 55,800 Q2: 80000 X 25% X $4.65 = $ 93,000Q3: 80000 X 45% X $4.65 = $ 167,400 Q4: 80000 X 15% X $4.65 = $ 55,800 (2) Membership Revenue Per quarter = Total Number of Members expected X Percentage of Member Subscribe during the quarter X Average amount of subscriptionQ1 : 1,255 X 40% X $112.75 = $ 56600.5 Q2: 1,255 X 20% X $112.75 = $ 28300.25Q3: 1,255 X 20% X $112.75 = $ 28300.25Q4: 1,255 X 20% X $112.75 = $ 28300.25

(3) Grant Revenue Per quarter = Total Amount of grants in a year X Percentage of donors donate during the quarterQ1 : $564,000 X 25% = $141,000 Q2: $564,000 X 50% = $282,000Q3: $564,000 X 10% = $56,400 Q4: $564,000 X 15% = $84,600

(4) Shop Sales Revenue Per quarter = Total Number of Visitors throughout the year estimated X Percentage of Visitors visit during the quarter X Average percentage of buying visitor X Average amount of Purchase Q2: 80000 X 25% X 5% X $40 = $40,000 Q3: 80000 X 45% X 5% X $40 = $72,000 Q4: 80000 X 15% X 5% X $40 = $24,000

(5) Fixed Costs Per quarter = Total Fixed costs during the year X 25% Q1 : $985,000 X 25% = $246,250 Q2: $985,000 X 25% = $246,250Q3: $985,000 X 25% = $246,250Q4: $985,000 X 25% = $246,250

(6) Variable costs per quarter = (Total Number of Visitors throughout the year estimated X Percentage visit during the quarter X Average per visitor Variable costs) + (Total Number of Visitors throughout the year estimated X Percentage visit during the quarter X Average percentage of buying visitor X Average amount of Purchase) X Cost of goods sold percentage ) Q1 : (80000 X 15% X $1.075) +(0.00) = $ 12,900 Q2: (80000 X 25% X $1.075) + (80000 X 25% X 5% X $40) X 65% = $ 47,500Q3: (80000 X 45% X $1.075 ) + (80000 X 45% X 5% X $40) X 65% = $ 85,500 Q4: (80000 X 15% X $1.075) + (80000 X 15% X 5% X $40) X 65% = $ 28,500

Summarization of the Yearly Budget of Revenues, Support and ExpensesFor The Year Ended 31 December, 1999 (Absorption Costing Format) Heads 1999

Revenues :

Visitors Revenue372,000

Membership Revenue141,501.25

Grant Revenue564,000

Shop Sales Revenue136,000

Total Revenue1,213,501.25

Costs :

Fixed Costs985,000

Variable costs174,400

Total Costs1,159,400.00

Surplus/(Deficit) $ 54,101.25

Solution to Problem 3We know from before,Average Marginal Revenue from the visitors = $4.65Average Variable Cost expensed for the visitors = $1.075Now, We compute the Total costs of Exhibiting the Nineteenth Century Navaho Craft . It is implied that we are not allowed to use surplus from the Already estimated budget, and emphasize on the exhibits self sufficiency .

Calculations Of the Costs of the Exhibit : Fixed cost for upgrading system $ 175,000 * Fixed cost of capital (175,000 X 9%) 15,750 Variable Costs 54,825 (Increased Visitors per month X Number of years $ 245,575

X 12 X Average VC) = (850 X 5 X 12 X $1.075) Total Costs

*( In Accounting Break-Even-Point analysis the Fixed cost of Capital is included , while it is excluded in Economics BEP analysis. This is Fixed cost of capital and not paid yearly, while working cost of capital would not have been considered here )

Calculations of the Total Revenue of the exhibit: (Increased Visitors per month X Number of years X 12 X Marginal Revenue)= (850 X 5 X 12 X $4.65 )= $ 237,150 Here Total Revenue Total Costs = $ 237,150 - 245,575 = (8,425) We will have to tell the Museum director that the exhibit is not self sufficient . TMSAC cant afford to show the exhibit solely based on the marginal contribution from incremental visitors. As the exhibit is not financially self- sufficient therefore we need a grant will of an estimated $8,425 . Presenting in a format to clarify the recommendation in a simple Income Statement which the director will understand. Projected Income Statement of the ExhibitFor the years of 1999-2003Revenues :Details

Total Revenue from the exhibit237,150

Total Revenue 237,150

Costs:

Fixed cost for upgrading system 175,000

Fixed cost of capital15,750

Variable Costs54,825

Total Costs$ 245,575

Net Income(8,425)

From here the Museum director can clearly see that the exhibit cant run within its budget successfully without a grants will of $8,425 .