Question

Grove City Broadcasting owns and operates a radio station and a television station in Grove City. Both stations are located in the same building and are operated as separate profit centers with separate managers, who are evaluated based on station profits. Revenues of both the radio and the TV station are from advertising spots. The price of a standard 30- second ad is based on audience size, which is measured by an independent outside agency. The radio station sells a 30- second ad for $ 100. (Assume that all 30- second ads sell for $ 100 regardless of the time of day they air.) The $ 100 price is based on an expected audience size of 20,000 listeners. If the listener audience were to double, the 30- second ad would sell for $ 200. In other words, each radio listener is worth $ 0.005 ($ 100 20,000) of advertising revenue per 30- second ad. Each TV viewer is worth $ 0.008 per 30- second ad. The radio station sells 3,550 ads per month, and the TV station sells 3,200 ads per month.
Sports Wire has approached both the radio and television managers about subscribing to its service, which brings all sports scores, sports news, and sports analyses to the station via an on- line computer system over the Internet. The radio and/ or TV stations’ sports announcers could download scores and news directly into sports scripts and read them over the air. Sports Wire is more comprehensive and contains more sports stories than the current general news wires that Grove City is receiving. If one of the two stations buys Sports Wire, the price is $ 30,000 per month. For an extra $ 5,000 per month, both the radio and the TV station can use Sports Wire. If both stations use Sports Wire, the $ 5,000 additional fee includes an extra computer terminal that allows two users to be on the system at the same time.
Sports Wire will not increase the number of ads each month, just the revenue per ad. The Grove City radio manager believes that purchasing Sports Wire would increase his audience by 1,500 listeners per ad. The television manager believes her audience size would increase by 500 viewers per ad.

Required:
a. If the two managers did not cooperate but rather each made a decision assuming he or she was the sole user of the system, would either buy Sports Wire? Support your answer with detailed calculations.
b. If the owner of Grove City Broadcasting had all the facts available to the two managers, would the owner buy Sports Wire?
c. The costs of the current wire services that Grove City purchases are allocated to the two stations based on the number of stories aired each month from the wire services. The owner of Grove City Broadcasting decides to purchase Sports Wire for both stations and to allocate its $ 35,000 cost based on the number of Sports Wire stories aired each month. During the first month, the radio station uses 826 Sports Wire stories and TV uses 574. Allocate the Sports Wire cost to the radio and TV stations.
d. What is the allocated cost per Sports Wire story in the first month?
e. Given the allocation of the Sports Wire cost, what behaviors can you predict from the radio and TV station managers?
f. Design an alternative allocation scheme that will avoid the problems identified in (e). Discuss the advantages and disadvantages of your allocation scheme.



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  • CreatedDecember 15, 2014
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