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Friday, April 30, 2010

Breakeven Analysis: A Case and Application

Dine and Listen to the Music of Relief - The American Red Cross Metropolitan Atlanta Chapter (“the Chapter” for brevity) encourages individuals all over the world to make donations to the American Red Cross. The Chapter, however, makes it clear that the Red Cross would not be able to accept non-monetary donations like food and clothing due to “storage and transportation requirements.” (“Fundraise for Disasters”) In this regard, the Chapter lists possible activities that may partner with them in raising funds. Among the listed activities are:

Hosting a special event such as a concert or a party, silent auction benefit, business proceeds donations, and conducting a workplace with a gift campaign;
Placing of the American Red Cross Banner on one’s/your Web site; and
Hosting a Blood Drive (“Fundraise for Disasters”)
The latest disaster that hit the American nation were “at least three (3) tornadoes that damaged dozens of homes and injured more than two hundred (200) people” (Associated Press, 2008). The Chapter is planning to raise funds for the tornado victims by organizing and hosting a dinner concert in one of the local bar-restaurants.

• The following information and measurements are related to the Chapter’s “concert hosting plan” (Stoddard):

The Date and Venue - The concert will be on May 23, 2008 starting 6 P.M at a local bar-restaurant. The venue restaurant is a sponsor to the concert requiring only 5% of the ticket proceeds or $1,200 whichever is higher. The seating capacity of the restaurant is 450 persons.

The Theme – “Dine and Listen to the Music of Relief”

Corporate Sponsors- The corporate sponsorship would at least generate a gross contribution of $ 9,750

Booking Agency - The booking agency would require a commission fee expense of 8% of the tickets sold and a fixed fee of $200. Tickets are sold at $ 75 each, exclusive of any drinks.

Ticket Sales and Promotion - A radio air time for two weeks prior the concert costs $1,000 and printing of tickets, flyers and other printed promotional materials and their distribution cost another $ 2,000. The ticket printing costs $ 50. The advertising cost is treated as 50% fixed and 50% variable.

Concert Goers Information Database and Documentation CD- The booking agency keeps the ticket holders’/buyers’ information for future use of the Chapter and for control purposes. The expense for this is included in the fixed fee mentioned in item “d”. The CD is a source of additional revenue and it is estimated that 50% of the audience would pay additional $ 7 for the souvenir CD that is to be picked up from the Chapter at least a week after the concert. Estimated cost for burning and editing a copy is $ 2.

The Band and the Rehearsal- Concert rehearsal cost is to be handled by the band. The band requires a talent fee of $ 12,000 from the organizers.

Emcees and organizers’ fund - The two emcees require no fee. The concert committee is also offering their services for free. Miscellaneous expenses, directly related to the concert would cost $600. This include snacks, meeting the sponsors, dining with sponsors, etc. Organization expenses is treated as fixed cost.

Given the above information and the view that a maximum of 385 tickets would be sold, breakeven analysis would greatly help the chapter in identifying a.) the minimum number of tickets sold to breakeven disregarding the CD proceeds; b.) the “feasibility” (Horngren, 1997) and monetary success of the activity; and c.) the number of tickets to be sold by the Chapter to raise at least $18,000 net for the victims, disregarding the CD sales.

• The Revenue the activity would be the tickets sold, the CD sold and the contribution of corporate sponsors, respectively:

385 tickets sold at $75 each = $ 28,875

192 CDs sold at $7 each copy = 1,344

Total Sponsor Contributions = 9,750

Total Revenue $ 39,969

• The Variable costs for the activity would be direct cost to each ticket and CD sold:

5% commission of the venue for the $28,875 tickets sold (if > 1,200) = $ 1, 444

8% Booking agency commission for tickets sold = 2, 310

Ticket Printing = 50

50% of the Promotional/advertising cost of $ 2,950 as variable cost = 1, 475

Cost of the 192 copies of CD sold at $2 each = 384

Total Variable Costs $ 5, 663

• The Fixed costs for the period/the activity include:

The music band’s talent fee = $ 12,000

Booking agency fixed fee = 200

50% of the advertising cost ($2,950) = 1,475

Organization expenses = 600

Total Fixed Costs $ 14,275

Relevant and Useful Breakeven Analysis for the activity

•Number of tickets to be sold to breakeven

Ticket Price = $ 75.00 Breakeven Point (BEP) = Fixed Cost/CM

Variable ticket cost = 13.71 = $ 14, 275/ $ 61.29

Contribution Margin (CM) $ 61.29 BEP = 233 tickets

Therefore, the project is feasible and advantageous. With 233 tickets sold the chapter is already at breakeven while the estimated number of tickets that can be sold is 385.
•The number tickets the chapter needs to sell in order to raise a net amount of $ 18,000

In this case, the targeted amount to be covered by the contribution margin is both the fixed cost and the $ 18,000. Using the breakeven point formula,
BEP = (Fixed Cost + $ 18000)/CM

=($ 14,275 + $ 18,000)/$48.57


BEP = 527 tickets

The chapter cannot reach the target net amount of $ 18,000. The number of tickets to raise a fund of this amount is 527 while the estimated tickets that can be sold is only 385 and the maximum capacity of the restaurant is only 450 persons.

Associated Press (2008, April 29). At least 140 homes hit by Virginia tornadoes. Retrieved May 2, 2008 from http://www.cnn.com/2008/US/weather/04/29/virginia.tornadoes/

Fund Raise for Disasters the American Red Cross Metropolitan Atlanta Chapter. Retrieved May 02, 2008 from http://www.atlantaredcross.org/site/c.csJLKZPLJvH/b.992171/k.789F/Fundraise_for_Disasters.htm

Horngren, Charles T., George Foster, and Srikant M. Datar. Cost Accounting: A Managerial Emphasis. Upper Saddle River, NJ: Prentice Hall, 1997.

Stoddard, Mark. (n/d). How to Organize a Non-profit Benefit Concert. (2007). Retrieved May 02, 2008 from http://www.classicalsinger.com/charity/shs/Benefit_Concert.pdf

Identify any activity with the American Red Cross where you can apply breakeven analysis. You MUST be able to define:

• A unit of measurement for the activity
• Revenue per unit for the activity
• Variable costs for the activity
• Fixed costs for the period in the activity

If you cannot identify specific actual amounts, make a reasonable estimate and apply the tool as if the data were factual.
Your report should include
• The name and nature of the organization
• The activity and time period you used
• The inputs you used
• Your results
• Any implications from your results and the financial and process information needed.

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