The Taos Museum of Southwestern Arts and Crafts TMSAC presents
The Taos Museum of Southwestern Arts and Crafts (TMSAC) presents rotating exhibits of the works of artists and artisans from the Southwestern United States. Historically, the museum has derived its funding from three sources: grants, annual memberships, and visitor revenues. For its next fiscal year, TMSAC expects to receive $564,000 in grants from various sources. It also expects 1,255 people to be supporting members of the museum. On average, supporting members each give TMSAC $125 per year. The museum expects the following mix of visitors during its next fiscal year, each paying the amount shown in the right column of the schedule.

TMSAC has $1,125,000 in fixed each year. In addition, the museum spends an average of $1.25 per visitor for handouts that describe the exhibits on display. TMSAC estimates that it has variable electric costs of $.25 per visitor. Plus, the museum offers each visitor the option of receiving an audio flash drive that describes the featured exhibit of the month. Visitors are allowed to keep the flash drive as a memento of their visit. Historically, these flash drives have cost the museum $ 3.00 each to produce and replicate. On average, 30 percent of the people visiting the museum have taken advantage of the free flash drive offer.

Question 1: The executive director of the museum has asked you to tell her the mini-mum number of visitors who must come to the museum each year in order for TMSAC to break even. Using the information given above, what is TMSAC’s break- even visitor volume?
Because of Taos’s location in the mountains of the southwest, the museum tends to have a seasonal pattern to its visitor flow with proportionally more people visiting TMSAC in the summer than in the winter. In addition, revenue from grants and memberships tends to flow into the museum unevenly throughout the year. The seasonal flow of visitor, grants, and membership revenues is distributed throughout the year as follows:

Fixed expenses are distributed evenly throughout the year, that is, 25 percent per quarter. The museum’s marketing director forecasts that 80,000 people will visit the museum during the coming fiscal year.
TMSAC’s director of marketing has convinced the executive director that a museum shop can be operated profitably in a small space just off the main entrance. She agrees, and the shop is scheduled to open on the first day of the second quarter. The marketing director estimates that 5 percent of the people who visit the museum will make purchases from the shop. Based on his experience, he expects the average purchase to be $40. TMSAC’s business manager estimates that the cost of goods sold will be 75 percent of the museum shop’s sales revenue. The shop will be staffed by volunteers at no cost to TMSAC.
Question 2. Using the information above, including the gift shop, prepare a budget of revenues, support, and expenses for TMSAC for each of the four quarters of the fiscal year, and summarize the budget for the full year.
Question 3. What impact would the inclusion of the gift shop have on TMSAC’s expected break- even volume during a normal full year of operation? You may assume that all other costs remain the same.
At the end of the third quarter, the executive director learned that the museum hosted 42,000 visitors for the quarter, as shown in the table below.
Type of Visitor Actual Visitor Mix
Senior Citizen...........9,660
Regardless of the option Glory chooses, the snowmaking system chosen will be depreciated over ten years with an assumed 5 percent residual value. Glory uses straight-line depreciation.
Question 3: Based on Glory’s 8 percent cost of capital, which system should management choose?
Glory Mountain has never offered any type of day care for younger children of skiing families. Given the changing demographics of its patrons, Dan Finn thinks that the Mountain needs to offer those services. Erika Fossett, Glory’s director of operations, has worked up a proposal for what she is calling the Glory Kids’ Center. She wants it to provide combined day care and ski lessons for children between the ages of 3 and 7. The center would be run by a director who will earn $ 60,000 per year plus benefits. For every 10 children using the Kids’ Center, the center will employ one full-time instructor. That instructor will provide both day care and skiing instruction. Each instructor will earn $ 25 per hour including benefits. The center will provide 8 hours of care per day. Instructors will only be paid for the hours the children are at the center. The children are fed lunch and a snack at a cost of $ 10 per child per day. Supplies for activities the children will be engaged in when they are not skiing will cost an average of $ 10 per child. Glory plans to charge $ 70 per day per child.
Question 4: As Glory’s finance manager, you have been asked to evaluate the fiscal feasibility of running Glory Kids’ Center. Your first question is how many children will have to be at the center on an average day for it to be profitable on a stand- alone basis.
Erika Fossett believes that the Kids’ Center will add 6 percent to overall skier days, and families with children between 3 and 7 will account for 10 percent of total skier days including the expected increase in volume. On average, families with children between 3 and 7 will enroll .25 children in the center each day they ski. She expects to employ and average of 6 instructors each day the ski area is open.
Question 5: Prepare a special- purpose budget for the Glory Kids’ Center. Do not include the incremental lift ticket revenue from the expected increase in the volume of skier days in your estimate. After completing these analyses, Dan Finn asks you to update the budget to include the impact of installing the wind turbine, replacing the snowmaking equipment and operating the Glory Kids’ Center. In addition, Glory will have to issue a $ 6,000,000 bond to finance the acquisition of the equipment. The interest rate on the bond will be 5 percent. It will require Glory to pay interest every six months and to repay the full $ 6 million of principal in 20 years. The bonds will be issued on the first day of Glory’s fiscal year, and all equipment will be put in service that same day.
Question 6: Using the base budget from Question 1 as a starting point, prepare a revised budget for Glory that incorporates all of these initiatives.
At the end of the season, bad weather caused the mountain to be open for only 115 days with an average of 2,600 people per day and an average price per lift ticket of $ 50.50.
Question 7: Starting with the revised budget, calculate the following lift ticket revenue variances and indicate whether they were favorable or unfavorable. Be sure to add up the flexible (partial) variances and check to make sure that sum equals the total variance.
a. Glory’s total lift ticket revenue variance for the ski season
b. The portion of the lift ticket revenue variance that was due to volume of days
c. The portion of the lift ticket revenue variance that was due to quantity of skiers per day
d. The portion of the lift ticket revenue variance that was due toprice
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