Mark Thomas, a recently graduated M.B.A., had been hired three months ago as assistant director of the Abbington Youth Center. Prior to earning his M.B.A., he had worked in several manufacturing firms, but he had never worked in a nonprofit organization. He knew little about Abbington’s programs or the educational and social theories in use by the professional staff, but had decided to take the job since he had been impressed with the Center’s attempts to provide high-quality programs for the children in his community.
Despite his lack of experience in organizations like Abbington, Mr. Thomas had brought some much-needed management skills to the center’s operations. In his short tenure with the center he not only had introduced some new management techniques, but had regularly made attempts to educate the professional staff in the use of those techniques.
This afternoon’s staff meeting was no exception. In attendance would be the center’s director, Helen Fineberg, and the coordinators of the center’s three programs: Fiona Mosteller (Infants and Toddlers Program), Joanne Olivo (Preschool Program), and Don Harris (After-School Program). As the names suggested, each program was aimed toward a different age-group: the first accepted children up to the age of three; the second from three to five years of age; and the third from five to seven years.
Mr. Thomas planned to instruct the program directors in the concept of breakeven analysis; in order to do so, he had gathered some data on the revenues and costs of the three programs (see Exhibit 1). Using this information, he determined that each student contributed $4,348 to fixed costs after covering his or her variable costs. Given the fixed costs of $498,700 ($328,000 in the programs and $170,700 for the center overall), he had calculated that 115 students were needed to break even.
He had prepared the breakeven chart, shown in Exhibit 2, which he planned to distribute to everyone at the meeting prior to giving a short lecture on the concept of breakeven analysis. His intent was to make clear to everyone that enrollment was exactly breakeven, which did not allow any margin of safety, and to encourage the program directors to expand the size of their programs by a few students each so as to provide a more comfortable margin and, if all went well, a substantial surplus for the center.
At the meeting, several issues arose that Thomas had not anticipated, and a rather hostile atmosphere developed. Ms. Mosteller pointed out that 50 students was the maximum her program could accommodate, given current classroom space, and wondered exactly how Mr. Thomas expected her to increase the program’s size. Ms. Olivo said she would be happy to expand her program by another 10 students, but in order to do so, she would need to hire another teacher, at a cost of $22,000. She wondered how Mr. Thomas might include this fact in his analysis, and, under the circumstances, whether the teacher should be considered a fixed or a . . .
- What assumptions are implicit in Mr. Thomas’s determination of a breakeven point?
- Using the data in Exhibit 1, calculate a breakeven point for each of the three programs? Why is the sum of these three volumes not equal to the aggregate breakeven volume?
- On the basis of the suggestions and comments made at the meeting, and making assumptions where necessary, prepare revisions to Exhibit 1. What is the new breakeven volume for the Center? What is it for each of the three programs?
- Based on the information in Exhibit 1, Ms. Fineberg is considering eliminating the After School Program. What advice would you give her?