Review Case 8.32 in your textbook. Using the questions provided as a guide, discuss your recommendation(s) regarding what the
Review Case 8.32 in your textbook. Using the questions provided as a guide, discuss your recommendation(s) regarding what the company should do about the conference. Support your recommendation(s) with calculations based on the data provided.
8.32 (LO 1) Identifying relevant costs and decision making It had been a quiet Monday morning for Anna Hogue, senior project manager at Flagstone Consulting. Everything seemed to be falling into place for the company’s first conference, “Healthcare Management in the New Millenium,” scheduled for October 11 and 12 in Boston. Then Ethan Tang, the staff consultant in charge of registration, stuck his head in the door.
“Anna,” said Ethan, “I think we may have a problem with the conference. Only 10 people have registered. Our marketing consultants told us to expect at least a 3% registration rate from our direct mail campaign. Based on the 5,000 conference fliers we mailed, do you think another 140 people will register in the next three weeks?” Anna and Ethan had worked together to develop a budget for the conference, as follows. They had budgeted for registration response rates of 2%, 3%, and 4%, but a response rate of 0.3% was far outside their expectations.
|
|
2% Response Rate |
3% Response Rate |
4% Response Rate |
|||
|
|
Total |
Per Attendee |
Total |
Per Attendee |
Total |
Per Attendee |
|
Registration fee income |
$69,500 |
$695 |
$104,250 |
$695 |
$139,000 |
$695 |
|
Expenses |
|
|
|
|
|
|
|
Meals |
15,000 |
$150 |
22,500 |
$150 |
30,000 |
$150 |
|
Conference materials |
7,500 |
75 |
11,250 |
75 |
15,000 |
75 |
|
Direct mail advertising |
6,000 |
|
6,000 |
|
6,000 |
|
|
Meeting room rental |
4,500 |
|
4,500 |
|
4,500 |
|
|
Equipment rental |
500 |
|
500 |
|
500 |
|
|
Speaker fees: |
|
|
|
|
|
|
|
Newton |
600 |
|
600 |
|
600 |
|
|
Smith |
2,000 |
|
2,000 |
|
2,000 |
|
|
Townsley a |
4,000 |
|
4,000 |
|
4,000 |
|
|
Speaker travel: |
|
|
|
|
|
|
|
Newton |
200 |
|
200 |
|
200 |
|
|
Smith |
1,200 |
|
1,200 |
|
1,200 |
|
|
Townsley |
1,000 |
|
1,000 |
|
1,000 |
|
|
Compton b |
200 |
|
200 |
|
200 |
|
|
Total expenses |
42,700 |
|
53,950 |
|
65,200 |
|
|
Net income |
$26,800 |
|
$50,300 |
|
$73,800 |
|
|
a Townsley required a $1,000 deposit upon confirmation of the original conference date. The remaining $3,000 was due upon her arrival at the conference. In the event of cancellation, the $1,000 deposit was non-refundable. b Compton has agreed to speak for free. |
Anna thought for a second, and then replied, “Ethan, based on what the marketing firm told us, at least 75% of all registrations are received a month before the conference. This response has me a bit worried. If we need to cancel the conference, we must do it before Thursday. Otherwise, it will be too late.” Anna and Ethan called a couple of contacts at other organizations, who related similar experiences with low preconference registration. They indicated that medical professionals often wait until the last minute to register and that in some instances, conferences had been rescheduled and re-advertised to increase registration.
Anna and Ethan decided they needed more information before they could make a final decision on the fate of the conference. Rescheduling it would require them to confirm the new dates with the speakers. Conference facilities would also need to be secured for the new dates. Fortunately, the conference materials had not been sent to the printer yet, so the printed materials would not become obsolete. Anna and Ethan decided that if the conference were rescheduled, Flagstone would offer a reduced registration fee of $595 to companies that sent more than one person.
Anna called some of the Boston-area professionals who had expressed interest in the conference but had not registered yet. Some of them indicated that they had never received the registration mailing. After contacting the marketing firm about the matter, Anna learned that there had indeed been problems with the mailing. The marketing firm had subcontracted the mailing to a second firm, which could not verify that all the materials had been mailed. Anna wondered how many other prospects had not received the mailing.
Next, Anna arranged a conference call with all the speakers, to explain what was going on. They agreed that the mailing problem could have contributed to the low registration. All the speakers were available on December 8 and 9, and were willing to change their schedules to accommodate Flagstone if the firm chose to reschedule the conference. Steve Smith indicated that he had already purchased a nonrefundable airline ticket for $800. If the conference were rescheduled, he would incur an additional $100 charge to change the flight. William Townsley indicated that he was already scheduled to be in Boston on December 7, so Flagstone would not have to cover his travel expenses if the conference were rescheduled.
Ethan called the University Parks Inn to discuss the facilities contract. Although Flagstone had made no payments to the hotel yet, the special events coordinator reminded Ethan of two points in the contract:
1. A cancellation fee of $10,000 would need to be paid if the conference were canceled at this late date. However, the inn would agree to waive the cancellation fee if the conference were rescheduled within four months of the original date.
Ethan also contacted the marketing firm about doing additional mailings. In light of the problems with the earlier mailing, the marketing firm offered to do two additional mailings for a total of $1,500. They also agreed to expand the mailing list to include several other professional organizations, as well as students at medical and nursing schools in the area. The firm estimated the new mailings would reach 8,000 people and should result in a 2% registration rate. Of that 2%, 10% were expected to qualify for the reduced registration fee.
Required
1.
a. What alternatives are available to Anna and Ethan with regard to holding the conference?
b. Prepare pro-forma income statements for each of the alternatives you identified in question (a).
c. Adjust the statements in part (b) by eliminating the unavoidable costs from the calculation to show only the relevant income/loss from each option.
d. What are the pros and cons of holding the conference as scheduled?
e. What are the pros and cons of canceling the conference?
f. What are the pros and cons of rescheduling the conference?
g. How should Flagstone view this conference—in the short term or in the long term?
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