ROAD
DATE:
TO: Dr.
Nargundkar, General Manager
FROM: Jonathan Courtois,
Data Analyst
Barbara
Klein, Data Analyst
Olena Shchukina, Data Analyst
Courtney Wilbanks, Data Analyst
SUBJECT: Road
INTRODUCTION
The Road Atlanta automobile racing facility located 50 miles Northwest of Atlanta is presently closed to the public. Road Atlanta is now considering opening the facility to the public. The management team at Road Atlanta has hired our team to research and analyze breakeven, pricing, and profitability to determine the best solution. Based on these analyses, our team has determined whether Road Atlanta should remain closed to the public or opened to spectators. This report communicates our findings.
RECOMMENDATION
After
conducting Breakeven and Pricing Analyses, our team recommends that Road
Atlanta opens racing events to the public when the expected turnout of
spectators is over approximately 2726 people. Events at Road Atlanta that do
not draw at least 2726 spectators will generate a loss. Based on extensive
market research of similar facilities, our team believes Road Atlanta events
will draw the minimum number of spectators needed, but it will depend on the
advertising and marketing strategy of Road Atlanta. Considering all of our
findings, our team recommends opening racing events to the public.
ASSUMPTIONS
These assumptions were prepared to complete our analyses and determine the benefits or downfalls to opening Road Atlanta racing events to the public.
Fixed Costs:
1.
There is an
advertising cost of $75,000.
2.
The ticket vendor's
cost is $350 per weekend.
3.
The insurance cost is
$4000.
4.
The souvenir shop's
cost is $300 to open per weekend.
5.
Staff salaries and
wages for a race weekend and the following week amount to $10,000.
Variable Costs:
- A
security guard, costing $250, is needed for every set of 2000 spectators.
- The
staff manages cleanup for up to 2000 people.
- Each
additional spectator over 2000 requires $0.45 of overtime or temporary
cleanup help.
Assumed Revenues:
1.
The average spectator
will spend $4.00 on concessions.
2.
Road Atlanta will keep
30% of concession revenues.
3.
25% of spectators are
expected to buy $70 worth of goods each. (25% of $70 is $17.50 per spectator)
4.
Road Atlanta keeps 40%
of souvenir revenues.
5.
Revenue from ticket
sales will be $25 per spectator.
·
Therefore, road
·
Therefore, Road
Atlanta will earn $7.00 per spectator for souvenir sales. (40% of $17.50 is
$7.00)
ANALYSIS
Our team completed breakeven and pricing analyses to determine the profitability of public racing events at Road Atlanta.
Influence Diagram
To begin our research and analysis, our team created the influence diagram below. This diagram was an outline for our analyses. (Please see note below for further information.)
This influence diagram is based on the information for this specific business decision. The decision maker should also take into account many other possible circumstances before making a business decision. Some possible circumstances one should consider are: Lawsuits, Bonuses, Discounts, or Weather Conditions. The diagram above is a demonstration only of the given information in this situation.
Breakeven Analysis
Our team created a breakeven analysis to analyze costs and revenues and understand the potential profitability of this decision. The breakeven analysis demonstrates the potential profits or losses based on the number of spectators expected to attend. Our analysis proved the breakeven point to be 2725.191 spectators. We will round that number up to 2726. It is at this point that the company will breakeven, or incur no losses and earn no profit. At 2727 spectators we begin to see a positive profit. The breakeven analysis was useful to our research. It helped us determine the number of spectators needed at each event to make opening the events to the public beneficial to Road Atlanta. Please evaluate our breakeven analysis graph below for further explanation.
Pricing Analysis
Finally, our team conducted a pricing analysis. The pricing analysis demonstrates the effect changing ticket prices has on profit. In other words, it demonstrates how a change in ticket price would affect the number of spectators expected to attend. This analysis has helped us to determine the best ticket price to charge. By charging between $25 and $35 per ticket, Road Atlanta will maximize their profits and avoid losses because the stadium will be filled to capacity and demand will be met. This pricing analysis is based on our assumptions of cost and revenue and will change if any cost or revenue variables are altered.
Our team researched the demand for similar racing facilities and surveyed potential customers to determine a demand equation. The demand equation our team used is 10,000-150*p. This demand equation demonstrates the demand for Road Atlanta racing events. If a racing event was free to the public, 10,000 spectators are expected to attend. Additionally, for each dollar the ticket price is increased, 150 less spectators will attend. By analyzing different prices and demand levels, we determined the optimal ticket price to be $33.20. Please evaluate our pricing analysis graph below for further explanation.
CONCLUSION
Our research demonstrates the potential profitability of a public racing facility to be great. Based on our analyses, we recommend opening the Road Atlanta facilities to the public. We recommend Road Atlanta follow our pricing strategy of $25 to $35 per ticket as explained above. This will maximize profits for each event. This price will ensure an appropriate amount of spectators will have a demand for the events.
Opening Road Atlanta to public spectators will require more security, more employees, more merchandise, and time, but will produce profit for Road Atlanta, if our recommendations are followed.
Should you have any questions regarding this memo or our findings, please feel free to contact our team at 1-800-555-5555.