Case Analysis : Taos Museum of Southwestern

Arts and Crafts

Here 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 U
Or, P X U - PVC X U = TFC
Or, U (P-PVC) = TFC
Or, 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 visitor Percent Of Total Price
Regular 65% $6.00
Group 15% $3.00
Senior Citizen 10% $2.00
Student 10% $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

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 $ 564,000.00
Annual Memberships Revenue
(Expected Number of supporting members X Donated amounts)
(1,255 X 112.75) 141,501.25


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
= 279498.75
1.0750
705,501.25

This 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 2
As 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 Expenses
For The Quarters ended in 30th April and 30 June 1999
(Absorption Costing Format)



Heads 1
st
Quarter 2
nd
Quarter
Revenues :
Visitors Revenue 55,800 93,000
Membership Revenue 56600.5 28300.25
Grant Revenue 141,000 282,000
Shop Sales Revenue - 40,000
Total Revenue 253,400.50 443,300.25
Costs :
Fixed Costs 246,250 246,250
Variable costs 12,900 47,500
Total Costs 259,150.00 293,750
Surplus/(Deficit) (5749.50) 149550.25

Quarterly Budget of Revenues, Support and Expenses
For The Quarters ended in 30th September and 31 December 1999
(Absorption Costing Format)


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 = $ 93,000
Q3: 80000 X 45% X $4.65 = $ 167,400
Q4: 80000 X 15% X $4.65 = $ 55,800
Heads 3
rd
Quarter 4
th
Quarter
Revenues :
Visitors Revenue 167,400 55,800
Membership
Revenue
28300.25 28300.25
Grant Revenue 56,400 84,600
Shop Sales
Revenue
72,000 24,000
Total Revenue 324,100.25 192,700.25
Costs :
Fixed Costs 246,250 246,250
Variable costs 85,500 28,500
Total Costs 331,750 274,750
Surplus/(Deficit) (7649.75) (82049.75)

(2) Membership Revenue Per quarter = Total Number of Members expected X
Percentage of Member Subscribe during the quarter X Average amount of
subscription
Q1 : 1,255 X 40% X $112.75 = $ 56600.5
Q2: 1,255 X 20% X $112.75 = $ 28300.25
Q3: 1,255 X 20% X $112.75 = $ 28300.25
Q4: 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 quarter
Q1 : $564,000 X 25% = $141,000
Q2: $564,000 X 50% = $282,000
Q3: $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% = $246,250
Q3: $985,000 X 25% = $246,250
Q4: $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% = $ 47,500
Q3: (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 Expenses
For The Year Ended 31 December, 1999
(Absorption Costing Format)

Heads 1999
Revenues :
Visitors Revenue 372,000
Membership Revenue 141,501.25
Grant Revenue 564,000
Shop Sales Revenue 136,000
Total Revenue 1,213,501.25
Costs :
Fixed Costs 985,000
Variable costs 174,400
Total Costs 1,159,400.00
Surplus/(Deficit) $ 54,101.25










Solution to Problem 3
We know from before,
Average Marginal Revenue from the visitors = $4.65
Average Variable Cost expensed for the visitors = $1.075
Now, 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
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 )




$ 245,575
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 Exhibit
For the years of 1999-2003
Revenues : Details
Total Revenue from the exhibit 237,150
Total Revenue 237,150
Costs:
Fixed cost for upgrading system 175,000
Fixed cost of capital 15,750
Variable Costs 54,825
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 .