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Case Study on Rothmueller Museum

Submitted to:
Prof. Suveera Gill

Presented By:
Ishan Goyal
Nishant Goyal
Tushar Singhal
Amikav Kothiala
Lalit Sondhi

Index
Introduction to case
Keywords
Cost Volume Profit Concepts
CVP and Break-even Analysis
Case discussions
References

Keywords
Contribution Margin
Contribution Margin Ratio
Break-even point
Profit Equation

s familiarize with the c

Francis P. Rothmueller, a north-west railroad

magnate , established an endowment to


fund the Rothmueller meauseum in
minepolis
The museum currently has a 30 million
endowment, but it also has substantial
operating costs
Annual earnings from the endowment
(approx. $25,00,000) are not sufficient to
cover operations and acquisitions.
Alice Morgan, photographic curator, is in
the process of planning and exhibition of
Ansel Adams photographs.

Revenue ($10,000 x $15)

$1,50,000

Other Museums and


collectors

$1,00,000

Packaging and
Transportations of
photographs from other
museums and collectors

$5,000

Event Insurance

$4,000

Alice Morgan Salary(25%)

$15,000

William Jacob Salary(25%)

$13,000

Guard Service

$12,000

Installation Cost

$2,000

Advertising

$70,000

Estimated
Exhibition
Attendance
Printed
is 10,000
Programs
and admission
$4,000 to exhibit
162000
is $15.
An admission of $6 is charged to enter the museum.
Profit(Loss)
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$12,000

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0

Gist:
Rothmueller Museum is planning an Ansel

Adams
exhibit.
Alice
Morgan,
the
photographic curator, wants to estimate its
financial impact.
It links C-V-P analysis and decision making.

Cost Volume
Concepts:
It

enables managers to
operating activity levels.

Profit(CVP)
plan

prospective

In specific, CVP analysis aids in


selecting which services or products to lay

emphasis on,
sales

volume required to meet targeted


levels of profit,

amount of revenue required to steer clear of

losses,
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any change required in the level of fixed cost,

According to CVP analysis, relation between

Total Fixed Cost(TFC), Variable Cost(VC), Per


unit Selling Price(SP) and Profit is given by:
Profit = SP(N) VC(N) TFC
where N = no. of units Sold.
Contribution Margin:
A measure of amount of incremental profit generated by
selling an additional unit.

Contribution Margin = SP(N) VC(N)


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Contribution Margin Ratio:

It measures the amount of incremental


profit generated by an additional dollar of
sales.

Contribution Margin =
SP

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SP VC

CVP and Break-even Analysis:


Break-even point is the number of units

that must be sold for a company to break


even to neither earn a profit nor incur a
loss.

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CVP and
(cntd.)

Break-even

Analysis:

There are three methods for determining

the break-even point:


Equation Method:

Profit = SP(N) VC(N) TFC


SP(N) VC(N) TFC = 0
Contribution Margin Method:
Profit + TFC
Q=
=
TFC
Contribution Margin
Contribution Margin
Graph Method
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0+

Lets Discuss the Case

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Q1: Prepare an analysis of the


financial
impact
of
the
exhibition on the Rothmueller,
assuming
attendance
is
10,000. Does offering the
exhibition appear to be a good
decision
from
a
financial
standpoint?
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The Figure of loss of $12,000 indicates that museum is

making a loss and exhibition is not profitable to the


museum.

But lets have a closer look at additional facts: the museum obtains additional revenue because of the

additional 4/5th of 10000 attendants who have just came to


museum because of exhibition.
All of these attendants would be charged $6 for the

admission to the museum over and above exhibition fees


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The above additional revenue generated

that has not been considered earlier from


the admission fees is

Profit(Loss)

$12,000.(1)
Additional

Revenue

$6

8000*

$48,000.(2)
Revised Profit

Also, further examination gives the details

$36,000.(3)

of additional profits.

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Also as mentioned 20 percent of attendants

make a purchase at the museum store with


an average purchase of $8.
As given in case study Contribution margin
ratio is 5%.
Thus
Additional
Profit(from
museum)
= 2000*
x $8is
x 0.05
profit purchases
on everyatsingle
dollar
of sale
0.05. = $800.(4)
Total Profits = $36,000 + $800
= $36,800..[(3) +(4)]

Therefore,

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Q2: How many people must


attend the exhibition for its
financial impact to be profit
neutral (i.e., the museum not
be
better
or
worse
off
financially)?
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Profit Equation:

Profit = SP(N) VC(N) + TFC

Profit + TFC
SP(N) VC(N)

, N is no. of attendants

Minimum

no. of attendants required to


reach break-even point can be calculated
by equating
Profit = 0..(5)
VC(N) = 0...(as all the incurred costs are
fixed in nature)

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Therefore, using (5) and (6)

Minimum no. of attendants = N =


1,62,000
(497/25)*
= 1,62,000 x 25
497
= 8149
(approx.)
*Total revenue
= (4/5)
x Nattendants
x $6 + N x $15
(1/5) x N for
x $8
Therefore,
8149
are+required
= (497/25)
Break-even
Point.x N
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References:
Managerial

Accounting, fifth edition by


James Jiambalvo.
Cost and Management Accounting, first
edition by Suveera Gill.

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Thank You

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