1. The Craddock Cup in its current form should be continued in order to maximize CYSL’s profits. Although it looks as though the Cup is incurring a loss, we need to analyze the relevant and irrelevant costs to truly determine the financial impact of discontinuing the cup. Although total expenses are $53,538, we need to eliminate the irrelevant, or unavoidable, costs when deciding whether the Cup should continue. In this case, the irrelevant, unavoidable costs include Rivaldo’s salary allocated to the tournament ($6,300), the field rental cost for the week ($1,200), and the rent/utilities expense for the Cup ($2,700).
When these costs are added, we get $10,200 in sunk costs that cannot be avoided regardless of the continuation of the Craddock Cup. Subtracting these irrelevant costs from the total expenses of the tournament, we get $43,338 in relevant costs. When you subtract these expenses from the revenue generated by the tournament, we end up with a relevant profit of $6,502. This means that the CYSL is making $6,502 more than it would if it eliminated the Craddock Cup. I would therefore recommend that the Craddock Cup be continued. 2.
My answer to the first question would change if the alternative to holding the Craddock Cup would be to rent the field to the Harvest Fair for $6,750. From purely a financial perspective, renting the field to the Harvest Fair would make the most sense. By doing this, the CYSL can make a $6,750 profit, excluding the allocated costs that are unavoidable and irrelevant. This is $248 more than the $6,502 they would profit by actually holding the tournament. So strictly by financial terms, it would make more sense to rent out the field in order to generate an increase in profit of $248 over the alternative of hosting the Craddock Cup. . When considering the decisions that management needs to make, it is important to consider not only the quantitative data, but also the qualitative characteristics. In this case, after considering the qualitative characteristics I would recommend that the CYSL continue to hold the Craddock Cup for multiple reasons. First of all, the influx of people that come to the tournament are advantageous for the nearby businesses. The economic advantages of the event would leave the town worse off than before. Also, the experience and opportunities that the Cup provides to high school soccer players are too crucial to ignore.
Revenues would increase to $85,680 (assuming while expenses would rise to $87,806. This leads to a reported net income of -$2,126. However, if we remove the irrelevant, unavoidable costs ($10,200), we get a relevant profit of $8,074. This is $1,572 more than the $6,502 relevant profit expected from a 32-team tournament. It would therefore be in the greater interest of the CYSL to host a 64-team Craddock Cup next year. 5. The profit margin for the 32-team tournament is 3. 62% higher than the profit margin for the 64-team tournament. For the 32 team tournament, the profit margin is $6,502/$49,840=13. 5%. For the 64 team tournament, the profit margin decreases to $8,074/$85,680=9. 423%. Although the 64-team alternative has the lower profit margin, it has higher overall profits and is recommended. Exhibit A (64-Team Financials) Revenues:Calculations Registration Fees18,880Doubled T-Shirts 9,600Doubled Concessions34,560Doubled Soccer Clinic 8,640Doubled Contributions14,000Same Total Revenue85,680 Expenses: T-Shirts 3,840Doubled (Variable) Concessions17,280Doubled (Variable) Clinic 5,184Doubled (Variable) Insurance 4,608Doubled (Variable) Registration 1,500Same (Fixed)
Field Rental 8,760(1200+6 fields x $210 x 6 days) Balls 864Doubled (Variable) Refs12,800Doubled (Variable) Trophies 1,800Doubled (Variable) Hotels 6,400$80x 2 nights x 15 + 4,000 Face Books 570450+(95-75)x$6 Marketing 3,2002,200+1000 CYSL Salaries18,300Same (Fixed) CYSL Rent 2,700Same (Fixed) Total Expenses87,806 Net Income:($2,126) Irrelevant/Unavoidable Expenses: Field Rental 1,200 CYSL Salaries 6,300 CYSL Rent 2,700 Total Irr. Exp. 10,200 Relevant Expenses: 87,806-10,200=77,606 Relevant Profit: Revenue85,680 Rel. Exp77,606 Rel. Profit 8,074