Question

The Clark Sports Camp operates three sports programs: basketball, lacrosse and field hockey. The camp provides a unique opportunity for boys and girls to engage in intensive summer sports activities. Parents often bring their all of children for the six week session. Due to diminishing profits in the basketball program, they are considering eliminating the basketball program. Camp owner Mikey Matheny has asked you to review the income statement, determine the impact on profit from dropping the basketball program and make a recommendation.
Clark Sports Camp Project Income Statement
Total Basketball Lacrosse Field Hockey
Camp Tuition $190,000 $75,000 $65,000 $50,000
Variable Costs $26,000 $12,000 $8,000 $6,000
for Food and Staff
Contribution Margin $ 164,000 $63,000 $57,000 $44,000
Fixed Expenses
Rent - Traceable $25,000 $10,000 $7,500 $7,500
Salaries of Sports $21,000 $10,000 $10,000 $1,000
Program Directors*
Allocated Common $90,000 $41,538 $27,692 $20,769
Fixed Expenses**
Total Fixed Expenses $136,000 $61,538 $45,192 $29,269
Net Operating Income $28,000 $1,462 $11,808 $14,731
(Loss)
*There is NO alternative work for the sports directors, if the sport program is eliminated, the sport program director will be eliminated.
**Common Fixed Costs are allocated based upon the number of campers but will remain constant.
Use the information above to answer questions 1-3.
1. What is the impact on profit if the basketball program is dropped?
2. For partial credit on the problem above, you can upload a spreadsheet here. (You will not receive full credit for the problem shown above if you do not upload a spreadsheet.)
3. Assume now that we are able to eliminate $50,000 of the allocated fixed costs if we drop the basketball program. What do you recommend? Write a memo to Mr. Matheny outlining your recommendation and your reasoning. Be sure to consider all of the stakeholders and use an appropriate decision model.

Answer 1

Answer:

1. Impact on profits:

Contribution Margin =                     $63,000

Less: Traceable Rent = $10,000

Less: Salary of Director = $10,000

Total avoidable fixed expenses = $20,000

Decrease in Profits =                      $43,000

Hence, the profits will reduce by $43,000 if the basketball program is eliminated.

3. If the allocated fixed costs can be reduced by $50,000. The program should be dropped since there will be an increase in profits by $7,000 (50,000 - 43,000). The avoidable costs and revenues should be taken into account for the purpose of this decision. If the avoidable costs are more than the revenues, the line should be dropped else not.

Hence, since after considering the reduction in allocated fixed costs, the avoidable costs are greater than revenues, the program should be dropped