Reference no: EM132617994

The Science Experience (SciExperience) is a recently established not-for-profit organization in Waterloo, Ontario. SciExperience focuses on science-based entertainment and education and will be holding a grand opening in two months.

The organization's mandate is to raise the profile of science and technology through an interactive and educational environment for the general public. Its initiatives include:

1. supporting science programs at local schools
2. allowing local universities to use SciExperience as a science resource centre to address declining enrolment in science programs
3. promoting lifelong learning in the area of science among seniors
4. allowing scientists to use SciExperience's equipment for a variety of research projects and share their studies in a monthly lecture series

• You, CPA, are the organization's controller. You recently met with Tom Kelloway, Executive Director, to discuss the admission prices. The board requires SciExperience to operate on a break-even basis. Tom noted that SciExperience will be the recipient of a $750,000 municipal government subsidy for each of its first two years. Given this, he would like you to recommend an appropriate admission price for the first two years of operations. You should base your price on the most likely scenario, but he would also like to understand the best- and worst-case scenario break-even prices based on the estimated ranges in admissions. Market study and cost information are included in Appendix I.

• The municipality indicated that it would not provide a subsidy after the second year. As such, SciExperience will need to adjust its prices at that time to make sure it still operates on a break-even basis. There are two proposed pricing options that could be adopted (Appendix II). Tom asks you to review both options and calculate the admission price that would need to be charged for each option for the third and subsequent years. Tom would also like you to discuss the non-financial aspects of each option.
• A third option is that instead of changing the admission price, a corporate sponsorship proposal could offset the lost grant (Appendix III). Tom would like you to evaluate this proposal as well. You should write report to Tom that evaluates each of the three alternatives and provides a recommendation on which one best suits SciExperience. Be sure to discuss any qualitative aspects that may be appropriate.

admission levels and operating cost data

Years 1 and 2

SciExperience anticipates that under the most likely scenario, the total demand will be 500,000 patrons per year (including all adults, students, senior citizens, and preschool children). Fixed costs are estimated at $3,950,000 and variable costs are estimated at $0.80 per patron.

The estimated breakdown of admissions is as follows:

Students 50%

Adults 30%

Senior citizens 10%

Preschool children 10%

The estimated breakdown of admissions and demand will not change for prices at or below $10 per person. Preschool children and seniors will be admitted for free. Students and adults will be charged the same admission price.

For the first two years, the following ranges in attendance and breakdown of admissions have been identified.

Attendance 400,000-600,000

Students 45-55%

Adults 25-35%

Senior citizens 5-15%

Preschool children 5-15%

Appendix II

Potential pricing options for year 3 and onwards

Option 1:

There will continue to be two different rates:

a) Senior citizens and preschool children will continue to be admitted free of charge.

b) Students and adults will be charged the same admission price.

To increase the number of admissions, $325,000 will be spent annually on promotion and advertising. It is estimated that this additional annual expenditure will result in a 20% increase in the total expected number of adult and student admissions for year 3 and beyond.

Option 2:

Senior citizens and preschool children will be charged an admission price equal to 60% of the adult and student admission price. This increase will cover the shortfall from the grant and provide funds for SciExperience to provide services specific to these groups.

SciExperience will spend $250,000 per year on transportation for seniors and $260,000 per year for additional educational material for preschool children. It is expected that with the increased services offered, attendance will stay steady, despite the price increase.

Appendix III

RetailPal proposal

• RetailPal is a popular children's television show and manufacturer of toys. The toys are miniature versions of everyday items. Children collect the toys and play with them or display them on a shelf. The focus is on collecting the whole set of RetailPal merchandise. The television program is an upbeat show that catches the attention of children. RetailPal has faced some criticism from parents and educators who see it as focusing on consumerism.

• RetailPal wants to improve its corporate image and expand its brand to attract parents who desire educational toys by offering science-focused toys. It sees SciExperience as a way to accomplish this and has offered to provide an annual grant of $750,000 starting in year 3 to replace the municipal subsidy. The grant would allow SciExperience to maintain its original pricing structure and provide a seamless experience for its customer base.

• RetailPal would require SciExperience to display the RetailPal company logo on all displays aimed at children. RetailPal would also require SciExperience to carry only the merchandise it chooses in the gift shop. SciExperience's gift shop currently operates on a break-even basis to provide educational science-based toys. RetailPal merchandise would be sold at a profit, with any money made reducing the amount of the grant, allowing SciExperience to continue to operate on a break-even basis.

• RetailPal would reserve the right to make references to SciExperience in its television show and advertisements. RetailPal plans to release a set of science-focused toys in the upcoming year, including tiny versions of a telescope, lab beaker, and periodic table.

Question:

Problem 1: What is an appropriate admission price for each of its first two years?

Problem 2: what are the best and worst case scenario break even prices based on the estimated ranges in admissions?

Problem 3: There are two pricing options presented after year 2 in APpendix II. Review both options and calculate the admission price that would need to be charged for each option for the third and subsequent years.

Problem 4: Please discuss the non financial aspects of each option as well.