Galaxy Science Center (GSC) is a nonprofit organization which was founded in late 19_7 as the first science museum to serve the city of Britannia. GSC’s initial construction and startup costs were provided by provincial and municipal government grants and private sector contributions. In return for its initial support, the provincial government expects GSC to operate an annual science fair that is expected to become one of the premier science fairs in the country within ten years.

GSC’s board of trustees reports directly to the municipal government which provided GSC with the following mandate: (1) to educate the general public, (2) to support the science programs of local schools, (3) to provide a science resource center for the municipality, and (4) to operate on a break-even basis without the need for further government funding. The local university, which has been experiencing declining enrollment in its science programs, especially welcomes the opening of GSC.

The grand opening of GSC is scheduled for the fall of 19_9. Initially, GSC’s services will include various scientific exhibits and educational films. The annual science fair will include a contest where science projects entered by students are to be judged and the best three exhibited at GSC. Future plans include adding a gift shop featuring souvenirs of both the science center and the city. With the grand opening quickly approaching, the board decided to hire an independent consultant to resolve the following issues:

1. Board members questioned how budgeting for operations should be applied to GSC, what performance measures are possible, and what should be considered in selecting output measures.

2. Two options are available for financing the computer and related software needed to assist in the operations of GSC—either buy or lease (see Exhibit A4- 1). The board requested a complete quantitative analysis of these two options and a recommendation.

3. Given GSC’s mandate, the only source of funding to cover the first year’s operating expenses would be through admission charges and a one-time subsidy granted by the municipality. The board requested that data resulting from an initial market study and cost analysis (see Exhibit A4-2) be analyzed and an admission price for the first year of operations be recommended.

4. Without a subsidy from the municipality after the first year, the board wondered whether it could continue admitting senior citizens and preschool children free of charge and still break even. Three options (see Exhibit A4-3) were put forward by the board for analysis.

5. A general pricing policy for items to be sold in the gift shop was needed.

REQUIRED

As Edyth Plum, the independent consultant hired by GSC’s board of trustees, analyze the five issues and prepare a report, complete with recommendations, to GSC’s board of trustees.

 

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EXHIBIT A4-1 GSC Computer Equipment Financing Options Analysis had indicated that GSC should obtain a model XTZ computer and related software for its operations. This equipment has an expected useful life of five years with no estimated salvage value. The two financing options identified by the board of trustees are described below. The appropriate discount rate to evaluate these options was stipulated to be 11%. Option One The XTZ computer and related software could be purchased for $40,500. Since GSC has only $20,000 available for this acquisition, the balance would be financed by a five-year bank loan at an annual interest rate of 11%. Equal annual payments would be due at the end of each year. Option Two The XTZ computer and related software could be leased from Acme Computers Ltd. The lease agreement would be for a five-year period requiring equal payments of $10,000 at the beginning of each year. EXHIBIT A4-1 GSC Computer Equipment Financing Options Analysis had indicated that GSC should obtain a model XTZ computer and related software for its operations. This equipment has an expected useful life of five years with no estimated salvage value. The two financing options identified by the board of trustees are described below. The appropriate discount rate to evaluate these options was stipulated to be 11%. Option One The XTZ computer and related software could be purchased for $40,500. Since GSC has only $20,000 available for this acquisition, the balance would be financed by a five-year bank loan at an annual interest rate of 11%. Equal annual payments would be due at the end of each year. Option Two The XTZ computer and related software could be leased from Acme Computers Ltd. The lease agreement would be for a five-year period requiring equal payments of $10,000 at the beginning of each year.