Presentation on theme: "Case : Grove City Broadcasting. 1 & 11 Strategic Cost Management Cost Allocation & Organization Behavior."— Presentation transcript:
Case : Grove City Broadcasting. 1 & 11 Strategic Cost Management Cost Allocation & Organization Behavior
Grove City Broadcasting Grove City Broadcasting owns and operates - Radio station - Television station in Grove City. Both radio station and television station are - located in the same building - operated as a separate profit centers with separate managers.
Grove City Broadcasting Managers of both stations are evaluted performance based on station profit Revenue of Both stations comes from sale of advertising spots ( The price be charged at a standard 30-second ads. based on audience size. ) Expected audience size at a 30-second ads. - Radio Station : 20,000 listener
Grove City Broadcasting Both radio station and television station are Subscribing General News Wire Station Audience Size (psn.) Sale price / a 30-sec ads. Sale rate/ each audience Sale ads. / Mth Total Revenue Radio20,000$ 100 $.005 / psn. ($ 100/ 20,000) 3,550 ads. $ 355,000 TVN/A $.008 / psn.3,200 ads. $ 320,000 Exhibit 1 Total revenue of ads. Spots before allocated Sport Wire Service cost
Sports Wire proposes its service to Grove City Broadcasting Subscribing one location $ 30,000 / month Subscribing two locations $ 35,000 / month with an extra computer terminal and two users can be on the system at the same time Managers believed that if use Sports wire can increase audience Radio station 1,500 listeners/ad TV station 500 viewers /ad Grove City Broadcasting Sports Wire is more comprehensive and contains more sports stories than the current general news wires
A) If the two managers did not cooperate but rather each made a decision assuming he or she was the sole user of the system, would either buy Sports Wire? Support your answer with detailed calculations. Q & A for Grove City Broadcasting
Station Added Audience Size (psn.) Sale rate/ audience ($ /psn.) Sale ads./ Mth Total Revenue Increase Radio1,500$.0053,550 ads. $ 26,625 (1,500*0.005*3,550) TV500 $.008 3,200 ads. $ 12,800 (500*0.008*3,200) Exhibit 2 Total revenue increase from using Sport Wire Services Q & A for Grove City Broadcasting Assumed still using General News Wire
So both stations will not buy Sports Wire services solely. Both stations revenue increase < $ 30,000 Q & A for Grove City Broadcasting
The owner of Grove City Broadcasting will buy Sports Wire RadioTV Total Revenue Increase Revenue /Mth (using Sport Wire Serv.) $ 26,625 (1,500*0.005*3,55 0) $ 12,800 (500*0.008*3,200) $ 39,425 Serv. Cost/Mth $ 30,000 (no coperated) $ 30,000 (no coperated) $ 35,000 (coperated) Net Profit/Loss/M th $ (3,375)$ (17,200) $ 4,425 Q & A for Grove City Broadcasting B) If the owner of Grove city Broadcasting had all the facts available to the two managers, would the owner buy Sports Wire ?
C) The costs of the current wire services that Grove City purchase are allocated to the two stations based on the number of stories aired each month from the wire services. The owner of Grove City Broadcasting decides to purchase Sport Wire for Both stations and to allocate its $ 35,000 cost based on the number of Sports Wire stories aired each month. During the first month, the radio station use 826 Sports Wire stories and TV use 574. Allocate the Sports Wire cost to the radio and TV stations. Q & A for Grove City Broadcasting D) What is the allocated cost per Sports Wire story in the first month ?
Q & A for Grove City Broadcasting Station No. of Sport Wire Stories Percentage Ratio Cost Allocation ($./ Mth) Radio % (826/1400) $ 20,650 (35,000 * 59 %) TV % (574/1400) $ 14,350 (35,000 * 41 %) TOTAL1, %$ 35,000 Allocated cost per Sports Wire story = $ 25/story ( 35,000 /1,400 ) Exhibit 3 Cost Allocation for Both Stations (using Sport Wire Service)
Q & A for Grove City Broadcasting E) Given the allocation of the Sports Wire cost, what behaviors can you predict from the radio and TV station managers ? Exhibit 4 Return after allocation of the Sport Wire cost Based/Mth RadioTV Total Revenue Increase Revenue$ 26,625$ 12,800$ 39,425 Allocated- Cost $ 20,650 $ 14,350$ 35,000 Net Profit/Loss $ 5,975$ (1,550) $ 4,425 Tax 30 % $ 1,
Using Sports Wire Service ; - Radio station can increase revenue much more than TV station. ( net profit for Radio = $ 5,975/Mth ) Radio station manager would bring many Sports Wire stories on air to reduce the allocation cost/story. TV station manager would bring less Sports Wire stories on aired since the allocation cost may larger than its revenue. ( also to reduce cost till to the same revenue value or more if possible ) Q & A for Grove City Broadcasting
F) Design an alternative allocation scheme that avoids the problems identified in (E). Discuss the advantages and disadvantages of your allocation scheme. Allocate cost according to their revenue increase by using revenue increase ratio. Q & A for Grove City Broadcasting
Station Increased Revenue Increased Revenue Ratio Cost Allocation ($./ Mth) Radio26, % (26,625/39,425) $ 23,800 (35,000 * 68 %) TV12, % (12,800/39,425) $ 11,200 (35,000 * 32 %) TOTAL39, %$ 35,000 Exhibit 5 Cost allocation scheme according to their revenue increase by using increased revenue ratio Q & A for Grove City Broadcasting
Advantage Disadvantage - Allocation based on increased revenue is fair to both parties - Both Radio & TV station have revenue increased - As profit center, the managers are satisfied - Distort motivation & improvement - Distort taxation plan to make one lose to exempt tax or to make the one which has less tax rate, to have more revenue. Q & A for Grove City Broadcasting
Exhibit 4 Shown Taxation Plan for Both Stations allocated by using increased revenue ratio Based/Mth RadioTV Total Revenue Increase Revenue$ 26,625$ 12,800$ 39,425 Allocated- Cost $ 23,800 $ 11,200$ 35,000 Net Profit/Loss $ 2,825$ 1,600 $ 4,425 Tax 30 % $ $ 480 $ 1,327.50