Question

The Columbia Arena Company formed in 2015 and uses the accrual basis of accounting. Using the company’s 2015 budget, provided in Exhibit 6.10, develop a pro forma operating budget for 2016 based on the following revenue and expense estimates:

a. It is forecasted that costs and expenditures will change in 2016 as follows:

• Merchandise COGS, G&A, Event Costs, and Maintenance will increase by 2.5%.

• Concessions COGS will increase by 4.5%.

• Utilities will increase by 8.0%.

• Personnel will increase by 2.5%.

• Insurance, Contract Services, Marketing, Management Fee, and

  Reserve are forecasted to remain the same.
  b. The arena is expected to generate cash receipts in 2016 as follows:

  ■ All rent will increase by 5.5%.
  ■ Concessions Gross will increase by 4.0%.
  ■Merchandise Gross, Suite Revenue, Club Seating Revenue,

  Advertising Revenue, and Naming Rights are forecasted to remain the same.

■ Box Office, Parking, and Ticket Fee revenues will decrease by 2.3%.

2. After you have calculated the 2016 budget, suppose your boss asks you to revise it so that overall revenues increase by 4% and operating expenses decrease by 1.5%.

1. Based on current trends in facility management, what revenues do you anticipate can be increased? What expenses can be decreased?

2. Use the 2016 budget that you created in Problem 1 and create a new 2016 budget based on the revenue increases and expense decreases outlined in Problem 2 and your work on Problem 2a.

EXHIBIT 6.10 Sample budget for Practice Problem 1.

COLUMBIA ARENA COMPANY 2015 OPERATING BUDGET

Revenues:

Rent from Sports Teams $ 465,000

Rent from Events $ 729,000

Equipment Rent $ 27,600

Concessions (Gross) $ 2,512,000

Merchandise (Gross) $ 244,600

Advertising and Sponsorships $ 580,400

Naming Rights $ 327,000

Box Office $ 150,560

Suite Revenue $ 781,700

Club Seat Revenue $ 549,360

Ticket Fees $ 654,000

Parking $ 482,010

Total Revenues $ 7,503,230

Less COGS:

Concessions COGS $ 1,507,300

Merchandise COGS $ 122,300

Total COGS $ 1,629,600

Gross Profit $ 5,873,630

Operating Expenses:

Personnel $ 981,000

G&A $ 218,000

Non-reimbursed Event Costs $ 163,500

Utilities $ 490,500

Insurance $ 272,500

Maintenance $ 369,800

Contract Services $ 119,900

Marketing and Promotion $ 218,000

Management Fee $ 109,000

Reserve $ 163,500

Total Operating Expenses $ 3,105,700

Operating Income (Loss) $ 2,767,930

Answer 1

Q.2 : After you have calculated the 2016 budget, suppose your boss asks you to revise it so that overall revenues increase by 4% and operating expenses decrease by 1.5%.

Below is 2015 budget, 2016 budget & updated 2016 budget as per above instruction.

Particulars	2015 OPERATING BUDGET	Increase / Decrease in cost for budget 2016	2016 OPERATING BUDGET	Increase / Decrease in cost for budget 2016 -Revised	2016 OPERATING BUDGET - Revised
Rent from Sports Teams	465,000.00	5.50%	490,575.00	4%	510,198.00
Rent from Events	729,000.00	5.50%	769,095.00	4%	799,858.80
Equipment Rent	27,600.00	5.50%	29,118.00	4%	30,282.72
Concessions	2,512,000.00	4.00%	2,612,480.00	4%	2,716,979.20
Merchandise	244,600.00		244,600.00	4%	254,384.00
Advertising and Sponsorships	580,400.00		580,400.00	4%	603,616.00
Naming Rights	327,000.00		327,000.00	4%	340,080.00
Box Office	150,560.00	-2.30%	147,097.12	4%	152,981.00
Suite Revenue	781,700.00		781,700.00	4%	812,968.00
Club Seat Revenue	549,360.00		549,360.00	4%	571,334.40
Ticket Fees	654,000.00	-2.30%	638,958.00	4%	664,516.32
Parking	482,010.00	-2.30%	470,923.77	4%	489,760.72
Total Revenues	7,503,230.00		7,641,306.89		7,946,959.17
Less COGS:
Concessions COGS	1,507,300.00	4.50%	1,575,128.50		1,575,128.50
Merchandise COGS	122,300.00	2.50%	125,357.50		125,357.50
Total COGS	1,629,600.00		1,700,486.00		1,700,486.00
Gross Profit	5,873,630.00		5,940,820.89		6,246,473.17
Operating Expenses
Personnel	981,000.00	2.50%	1,005,525.00	-1.50%	990,442.13
G&A	218,000.00	2.50%	223,450.00	-1.50%	220,098.25
Non-reimbursed Event Costs	163,500.00	2.50%	167,587.50	-1.50%	165,073.69
Utilities	490,500.00	8.00%	529,740.00	-1.50%	521,793.90
Insurance	272,500.00		272,500.00	-1.50%	268,412.50
Maintenance	369,800.00	2.50%	379,045.00	-1.50%	373,359.33
Contract Services	119,900.00		119,900.00	-1.50%	118,101.50
Marketing and Promotion	218,000.00		218,000.00	-1.50%	214,730.00
Management Fee	109,000.00		109,000.00	-1.50%	107,365.00
Reserve	163,500.00		163,500.00	-1.50%	161,047.50
Total Operating Expenses	3,105,700.00		3,188,247.50		3,140,423.79
Operating Income (Loss)	2,767,930.00		2,752,573.39		3,106,049.38

Q.2b Based on current trends in facility management, what revenues do you anticipate can be increased? What expenses can be decreased?

Based on current trend the revenue from club seat can be increased as it stands for status symbol and hence people tend to spend on this. Further revenue from Advertisement and naming right can also be increased as people at large interested in marketing activity

The operating expense are kind of fixed cost and will rise year on year on the base of rising cost / inflation. The effort in reduction or controlling COGS might be helpful.