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# Breakeven and budgets

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Taos Museum of Southwestern Arts and Crafts

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The Taos Museums 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 support from three sources: grants, annual memberships, and visitor revenues. For the 2010 fiscal year, TMSAC knows that it will receive \$564,000 in grants form various sources. It also expects 1,255 people to be supporting members of the museum. On average, supporting, members give TMSAC \$112.75 per year. The museum expects the following mix of visitors during 2010, each paying the amount shown in the right column of the schedule.

___________________________________________________________
Type of Visitor Percent of Total Price
____________________________________________________________
Regular 65% \$6.00
Group 15% \$3.00
Senior Citizen 10% \$2.00
Student 10% \$1.00
_____________________________________________________________

TMSAC has \$985,000 of fixed expenses each year. In addition, the museum spends an average of \$0.55 per visitor for handouts that describe the exhibits on display. TMSAC estimates that it has variable electric costs of \$0.15 per visitor. Plus, the museum offers each visitor the option of receiving an audio cassette which describes the featured exhibit of the month. Visitors are allowed to keep the tape as a memento of their visit. Historically, these tapes have cost the museum \$ 1.25 per copy to produce and replicate. On average, 30% of the people visiting the museum have taken advantage of the free tape offer.

Problem 1.

The Director of the museum has asked you to tell her the minimum number of visitors that 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 New Mexico, 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 tend 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:

_____________________________________________________________________
Quarter 1 Quarter 2 Quarter 3 Quarter 4
_____________________________________________________________________

Visitors 15% 25% 45% 15%
Membership Revenue 40% 20% 20% 20%
Grant Revenue 25% 50% 10% 15%
______________________________________________________________________

Fixed expenses are distributed evenly throughout the year, that is, 25% per quarter. The museum's marketing director forecasts that 80,000 people will visit the museum during fiscal year 2010.
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 April 1, 2010, the first day of the second quarter. The Marketing Director estimates that 5% 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-good-sold will be 65% of the museum-shop's sales revenue. The shop will be staffed by volunteers at no cost to TMSAC.

Problem 2.

Using the information above, prepare a budget of revenues, support and expenses for TMSAC for each of the four quarters in fiscal year 2010 and summarize the budget for the full year.

TMSAC has just been approached by the Curator of Special Exhibits at the Smithsonian Museum. The Smithsonian has offers to lend TMSAC a rare collection of 19th-century Navaho crafts. The collection would remain at the museum for a five-year period after which it would be returned to the Navaho nation. To house the exhibit, TMSAC will have to upgrade its environmental and security systems at a one-time cost \$175,000.

Since this may be the last time that this collection will be exhibited in its entirety, the Executive Director is enthusiastic about the impact that it will have on visitor volume and the reputation of the museum. The Marketing Director forecasts that 850 incremental visitors are likely to be drawn to the museum each month that the exhibit is at TMSAC.

The director wants you to tell her if the exhibit is financially self-sufficient or if she will need to get a grant to support it. You know that TMSAC's cost of capital is 9%. You also know the marginal contribution generated by each incremental visitor to the museum from your work on the break-even analysis. Do not count on any gifts shop purchases from the incremental visitors.

Problem 3.

What do you tell her? Can TMSAC afford to show the exhibits based solely on the marginal contribution from the incremental visitors? If the exhibit is not financially self-sufficient, how large a grant will TMSAC need to get to meet the projected shortfall? Support you recommendation and present your findings in a way that the director will understand.