The Craddock Youth Soccer League

DEPARTMENT OF ACCOUNTANCY

UNIVERSITY OF ILLINOIS

MEMORANDUM

TO:                 Jose Rivaldo

FROM:         

DATE:         October 16, 2018

SUBJECT:         The Craddock Cup Analysis

INTRODUCTION

The Craddock Youth Soccer League (CYSL) is a local provider of soccer activities to teenagers. For years, in addition to regular operations, CYSL has successfully hosted the annual premiere soccer tournament, the Craddock Cup (the “Cup”). The tournament was expected to generate profits of at least $6,000 annually for CYSL but it has averaged a loss of almost $4,000 a year and was in danger of being canceled. Mr. Jose Rivaldo, the general manager of CYSL, gave the Board recommendations to increase the Cup’s profits and to continue the tournament. Therefore, this memorandum will evaluate the four provided alternatives, including dropping the tournament, keeping it as is, expanding the tournament by teams, and expanding the tournament while increasing marketing expenditures. According to the analysis, the third option is the best choice for Rivaldo.

GENERAL DISCUSSION OF COSTS

        As the basis of the break-even analyses for the four alternatives, the costs incurred in the tournament are classified as variable or fixed. Variable costs are dependent on the size of the tournament with variable factors, like number of players, and number of games. Expenses on T-shirts, concessions, soccer clinics, player insurance, referees, trophies, hotels, face books, extra field rentals, extra equipment rentals, and soccer balls are all variable costs. Fixed costs stay unchanged whatever the size of the tournament. Fixed costs taken into account include registration fees, marketing and advertising expenses, and the salary expense for Jansten, the part-time employee solely responsible for the Cup. Jansten’s salary cost should be zero if CYSL no longer holds the Cup.

However, there are other fixed costs that should be excluded. These costs are irrelevant for decision making and are categorized as sunk costs. CYSL will always expend $48,000 for total city field rental, $42,000 for Rivaldo’s salary and $18,000 for rent and utilities regardless of the Cup. Applying the given allocation rate of the tournament, there are sunk costs of $10,200 in total for the Cup including $1,200 in city field rental expense, $6,300 in Rivaldo’s salary expense and $2,700 in utilities expense. Sunk costs remain the same under all circumstances and have no impact on the evaluation of the four alternatives.

ANALYSIS OF THE FOUR ALTERNATIVES

Eliminating the tournament (Alternative 1)

        If the organization discontinues the tournament, the total revenue, the variable costs, and fixed costs should be zero. As shown in Exhibit A, Jansten’s position and the corresponding cost will be eliminated.  However, the organization will pay for other employees unchangingly under any circumstance. There will be no reduction for Rivaldo’s salary expense, city field rental expense, and rent and utilities expense because they are not relevant to the Cup’s expenses. Therefore, the Cup’s profits will be zero. CYSL will neither gain nor lose money under Alternative 1.

Keeping the current tournament (Alternative 2)

        If CYSL keeps the current tournament as it stands, Rivaldo will exceed his goal with a net profit of $6,502 as shown in Exhibit B. Rivaldo made the profit statement with a loss of around $4,000 because he did not exclude the sunk costs. This profit statement should be revised and irrelevant costs should be deleted. Therefore, the total fixed cost should be $15,700, and the Cup needs 23 teams to break even. For the current size of 32 teams, the tournament will be very profitable.

Expanding the tournament (Alternative 3)

        If CYSL expands the tournament to 64 teams, the Cup will generate a total revenue of $85,680 and a net profit of $11,594. As indicated in Exhibit C, the revenue and most of the variable costs will double with the size expansion of the tournament. However, for extra field rental expense, since there will be 16 fields needed and ten of them will be covered by CYSL’s city field rental, six fields will be rented from local schools for six days including two-day preparation, two-day game and two-day cleaning at the cost of $5,400. A similar computation applies for extra field equipment rental expense, which will be $2,160. For expenses of hotel and face books, the number of scouts and publishing will remain unchanged so the costs will still be $4,000 and $450 respectively. Therefore, the contribution margin will be $27,294 and the break-even point will be 37 teams. Alternative 3 is more profitable than Alternative 2.

Expanding the tournament with increased marketing (Alternative 4)

        If CYSL keeps the tournament of 64 teams and increases $1,000 in marketing expenses, there will be a total revenue of $85,680 and a net profit of $8,074. Compared with Alternative 3, most of the variable costs are the same. However, as shown in Exhibit D, the expenses on hotels and face books will increase to $6,400 and $570 respectively because of the increase of the number of scouts and face book publishing. The contribution margin will increase to $24,774. Also, the total fixed costs will be $16,700 due to $1,000 increase in marketing expenses. Therefore, the break-even point of the tournament will be 44 teams.  Alternative 4 is less profitable than Alternative 3 because of the increase in fixed costs.

RECOMMENDED COURSE OF ACTION

        Based on the evaluation above, Alternative 3 is the best choice for Rivaldo. Expanding the tournament to 64 teams will generate the most net profit and also require less fixed costs than Alternative 4.