The Craddock Cup

5 Pages   |   1,411 Words

1- Summary of the Case

Craddock Cup was a soccer tournament instituted by the Craddock Youth Soccer League (CYSL). Jose Rivaldo, the general manager at the soccer league, was responsible for holding the annual tournament comprising of 32 high school teams. Originated with a view to generate profits, Craddock Cup was incurring heavy losses due to increasing expenses and lack of sponsorships. The tournament was at the brink of being cancelled, and Rivaldo had to fathom a way to save the Craddock cup and his job.
Comprising of 16 teams each from girls’ high schools and boys’ high schools, the tournament was funded through a participant registration fee, sponsorship, and souvenirs sale. The tournament was a huge success within the community, and the top colleges attended it to recruit the top athletes. The interest of college recruiters was also captured by publishing a ‘face book’ which contained the profile of every player who was aged 16 years or more.
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.
 

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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:
Revenue  
Registration 9,440
T-shirts 4,800
Concessions 17,280
Soccer Clinic 4,320
Total Revenues 35,840
Costs  
T-shirts 1,920
Concessions 8,640
Soccer Clinic 2,160
Player Insurance 2,304
Field Rental - 6 extra fields 2,520
Soccer Ball 432
Referee 6,400
Trophies 800
Total Expenses 25,176
   
Additional Profits 10,664
 
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:
Additional Expenditure
Marketing & Advertising Expenses 1,000
Hotel Costs of Additional College Recruiters 2,400
Publishing Costs of additional Face books 120
Total 3,520
 
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.

5- Recommendations

It is believed that Craddock Youth Soccer League (CYSL) has misallocated the rent and utilities expenses to Craddock Cup. Furthermore, if a discontinuation decision has to be made, the league has to remove Rivaldo salary allocation from the profit calculation as well. The removal of these two expenses alone will increase the profit to the vicinity of $6,000 – the target figure. Moreover, Rivaldo is convinced that he can double the number of participating teams to 64. If he can achieve that without increasing the expenses by more than what is expected, the tournament might be able to generate another $10,000 in profits for the league. Therefore, it is recommended that the league should persist with the Craddock Cup. Besides the financial aspect, the tournament is also a good publicity vehicle for the league, and a way to involve the public in its activities. 

6- Reflections

This case study is a classic example of how the accounting presentation of items can hide their economic reality. On the looks of it, the Craddock Cup seemed to be a loss-making venture that was going against the principle objective of its creation. However, a recalculation of some overhead allocations revealed that the tournament was actually producing a positive return for the league. Moreover, the case shows how an increase in the scale of operations might allow us to generate incremental profits. This is because the fixed expenses associated with the activity remains fixed while the total contribution increases with higher revenues. This case highlights the importance of managerial accounting that disregards the arrangement followed in constructing financial statements, and highlights the financials activities through a new dimension. It provides more useful information to a company’s managers and enables them to analyze the situation more pertinently.

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