3 Grove City Broadcasting Grove City Broadcasting owns and operates- Radio station- Television stationin Grove City.Both radio station and television station are- located in the same building- operated as a separate profit centers withseparate managers.
4 Grove City Broadcasting Managers of both stations are evaluted performance based onstation profitRevenue of Both stations comes fromsale 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
5 Sale rate/ each audience Grove City BroadcastingExhibit 1 Total revenue of ads. Spots before allocated Sport Wire Service costStationAudience Size (psn.)Sale price / a 30-sec ads.Sale rate/ each audienceSale ads. / MthTotal RevenueRadio20,000$ 100$ .005 / psn.($ 100/ 20,000)3,550 ads.$ 355,000TVN/A$ .008 / psn.3,200 ads.$ 320,000Both radio station and television station areSubscribing General News Wire
6 Grove City Broadcasting Sports Wire is more comprehensive and contains more sports stories than the current general news wiresSports Wire proposes its service to Grove CityBroadcastingSubscribing one location $ 30,000 / monthSubscribing two locations $ 35,000 / monthwith an extra computer terminal and two userscan be on the system at the same timeManagers believed that if use Sports wire can increase audienceRadio station , listeners/adTV station viewers /ad
7 Q & A for Grove City Broadcasting 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.
8 Q & A for Grove City Broadcasting Exhibit 2 Total revenue increase from using Sport Wire ServicesStationAdded Audience Size (psn.)Sale rate/ audience ($ /psn.)Sale ads./ MthTotal Revenue IncreaseRadio1,500$ .0053,550 ads.$ 26,625(1,500*0.005*3,550)TV500$ .0083,200 ads.$ 12,800(500*0.008*3,200)Assumed still using General News Wire
9 Q & A for Grove City Broadcasting Both stations revenue increase < $ 30,000So both stations will not buy Sports Wire services solely.
10 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 ?RadioTVTotal Revenue IncreaseRevenue /Mth (using Sport Wire Serv.)$ 26,625(1,500*0.005*3,550)$ 12,800(500*0.008*3,200)$ 39,425Serv. Cost/Mth$ 30,000(no coperated)$ 35,000(coperated)Net Profit/Loss/Mth$ (3,375)$ (17,200)$ 4,425The owner of Grove City Broadcasting will buy Sports Wire
11 Q & A for Grove City Broadcasting C) The costs of the current wire services that Grove City purchaseare allocated to the two stations based on the number of storiesaired each month from the wire services. The owner of Grove CityBroadcasting decides to purchase Sport Wire for Both stations andto allocate its $ 35,000 cost based on the number of Sports Wirestories aired each month. During the first month, the radio stationuse 826 Sports Wire stories and TV use 574. Allocate the SportsWire cost to the radio and TV stations.D) What is the allocated cost per Sports Wire story in the firstmonth ?
12 Q & A for Grove City Broadcasting No. of Sport Wire Stories Exhibit 3 Cost Allocation for Both Stations (using Sport Wire Service)StationNo. of Sport Wire StoriesPercentage RatioCost Allocation($./ Mth)Radio82659 %(826/1400)$ 20,650(35,000 * 59 %)TV57441 %(574/1400)$ 14,350(35,000 * 41 %)TOTAL1,400100 %$ 35,000Allocated cost per Sports Wire story= $ 25/story ( 35,000 /1,400 )
13 Q & A for Grove City Broadcasting Total Revenue Increase E) Given the allocation of the Sports Wire cost, what behaviors canyou predict from the radio and TV station managers ?Exhibit 4 Return after allocation of the Sport Wire costBased/MthRadioTVTotal Revenue IncreaseRevenue$ 26,625$ 12,800$ 39,425Allocated-Cost$ 20,650$ 14,350$ 35,000Net Profit/Loss$ 5,975$ (1,550)$ 4,425Tax 30 %$ 1,792.50-
14 Q & A for Grove City Broadcasting 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 Wirestories on air to reduce the allocation cost/story.TV station manager would bring less Sports Wirestories on aired since the allocation cost may largerthan its revenue. ( also to reduce cost till to the samerevenue value or more if possible )
15 Q & A for Grove City Broadcasting F) Design an alternative allocation scheme that avoids the problemsidentified in (E). Discuss the advantages and disadvantages ofyour allocation scheme.Allocate cost according to their revenue increaseby using revenue increase ratio.
16 Q & A for Grove City Broadcasting Increased Revenue Ratio Exhibit 5 Cost allocation scheme according to their revenue increase by using increased revenue ratioStationIncreased RevenueIncreased Revenue RatioCost Allocation($./ Mth)Radio26,62568 %(26,625/39,425)$ 23,800(35,000 * 68 %)TV12,80032 %(12,800/39,425)$ 11,200(35,000 * 32 %)TOTAL39,425100 %$ 35,000
17 Q & A for Grove City Broadcasting Advantage- Allocation based on increased revenue is fair to both parties- Both Radio & TV station have revenue increased- As profit center, the managers are satisfiedDisadvantage- Distort motivation & improvement- Distort taxation plan to make one lose to exempttax or to make the one which has less tax rate,to have more revenue.
18 Q & A for Grove City Broadcasting Total Revenue Increase Exhibit 4 Shown Taxation Plan for Both Stations allocated by using increased revenue ratioBased/MthRadioTVTotal Revenue IncreaseRevenue$ 26,625$ 12,800$ 39,425Allocated-Cost$ 23,800$ 11,200$ 35,000Net Profit/Loss$ 2,825$ 1,600$ 4,425Tax 30 %$$ 480$ 1,327.50