The Craddock Cup Case Solution

In the Income Statement, Rivaldo considered a few overhead expense allocations to be dubious. He wondered if it was justified to allocate his salary to the tournament considering that he would continue working for CYSL even if the tournament was discontinued. Rivaldo was confused about the true operating profit of the tournament. He considered the changes that could improve the profitability of the next year’s tournament. The proposed changes included increasing the number of teams from 32 to 64, increasing the advertising budget to attract more college recruiters, and raising the participant registration fee.

2. The Primary Problem

The principal issue in the case concerns the profitability of the Craddock cup. The tournament was launched with a view to generate funds for field-acquisition program of the Craddock Youth Soccer League (CYSL). The goal was to generate $6000 is profits each year. Instead, the tournament has produced heavy losses. Thereby, the tournament has not only failed to meet its objective but it has also sabotaged the objective by eating up the league’s resources. Therefore, the main purpose is to turn the tournament from a loss making venture to a profitable enterprise.

3. The Secondary problems

One of the problems secondary problem concerns the allocation of overhead expenditure. Rivaldo is not sure if he should keep allocating his salary to Craffock Cup when he will keep earning it regardless of the existence of the cup. Similarly, the rent on the field could be understood as a suck cost because the league would continue to pay the rent for 40 weeks even if the tournament was abolished. The secondary problems have been derived from the primary problem that concerns increasing the profitability. Therefore, any factor that is related to the primary factor of profitability can be seen in the context of a secondary problem. By this logic, any plans to decrease expenses or increase revenues also fall under the umbrella of secondary issues.

4. The Case Questions

a. Overhead Expense Allocations

Under standard managerial accounting practice, Rivaldo is right to allocate 15% of his salary to Craddock Cup since 15% of his time is spent on it. Time is a good allocation base in this case. Similarly, the field is being used for the tournament and it makes sense to allocate its rent to the tournament. Therefore, when Rivaldo wants to check the profitability of Craddock Cup for management purposes, he should follow the current allocation patterns for salary. The allocation of office rent and utilities to the Craddock Cup is not suitable. The office and the utilities are not being used for the tournament and there are no rational bases to allocate them. They should be allocated to the purpose for which they are used – CYSL activities.

The allocations would differ when making a decision on whether to discontinue the tournament. The decision to discontinue will be a capital budgeting decision, and such a decision only takes incremental costs into account. Rivaldo will continue to earn his salary regardless of the existence on Craddock Cup. Since, his salary is not dependant on the existence of the tournament, and it should not be considered when deciding to abandon the tournament. The same cannot be said about Jansten, who will be fired if the tournament is discontinued. Therefore, Jansten’s salary should be included in any case. The rent on the field will continued to be paid for 40 weeks in any case. So, it becomes a sunk cost when deciding on discontinuation of the tournament, and it should not be included.

b. Adding 32 Additional Teams

The incremental revenues and expenses for adding 32 additional teams are calculated in the table below:

The assumption underlying this calculation is that the additional 32 teams have similar impact on each of the revenue and expense area as the first 32 teams. In other words, the revenues and expense included in the table above are taken as variables expenses. The fixed expenses have been excluded as they would not affect the profit generated from the additional 32 teams. In the absence of any information, it is assumed that the 32 extra teams will not increase the contributions, salaries, face book printing costs, hotel expenses for college scouts, registration cost with state YSL, and marketing expenses. If these assumptions hold, Rivaldo can expect to generate profits of about $10,000 – just enough for Craddock Cup to meet its overall profitability target of $6,000.

c. Breakeven Registration Fees

Rivaldo wants to calculate the amount by which registration fees will have to be increased to fund the additional $1000 proposed to be spent on marketing and advertising. This additional expenditure will also increase the number of college recruiters by 15, and the number of published face books by 20. Therefore, the additional costs of these expenses will also need to be accounted for in the break even analysis. Overall, the total expenditure is summarized in the table below:

Therefore, additional revenue of $3,520 has to be generated from registration fee. Since there will 64 participating teams, the additional required revenue per each team will be $3,520 divided by the 64 teams. This comes out to be an additional $55 per each team. Therefore, the registration fee for each team will have to be increased from $295 to $350 if the league wants to breakeven on additional expenses associated with marketing.