The Inglis University Library Donations Department
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The Inglis University Library Donations Department Part 1 (Memorandum to the Chair of the Budget Committee) Date: To: From: Subject: March 23, 2012 Chair of the Budget Committee Yunzheng Zhao, Management Accountant Donations Department’s Request for Additional Funding
After reviewing the budget committee’s analysis, I believe that it made an inappropriate decision in denying the donations department’s request for additional funds. I will examine its decision through a cost-benefit analysis which shows that it may have overestimated the costs of maintenance, and overlooked the benefits of this important department. The budget committee overestimated the unit cost due to missing revenue, improper cost structure, and underestimated capacity. First, based on the cost schedule, the committee overlooked the revenue that the donations department made from its bi-annual book sales. Secondly, they did not separate the fixed cost and the variable cost of books while calculating the total cost. Finally, they overlooked the possible increase in the annual capacity of processed donations that would result from hiring additional employees. To correct these errors, I revised the cost schedules and the income statements for both before and after acquiring additional funds. I decided to use the contribution approach because I believe that it will be more relevant to separate the fixed cost and the variable cost, since they will change the unit cost in different ways following an expansion of the donations department. While calculating the total cost, I believe that it would be more relevant to deduct the biannual book sales’ revenue from the total cost, because the revenue can subsidize this
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department. For this reason, I used the operating loss (rather than the actual operating expense) to calculate the unit cost of donated books. As shown in Part 2, this method brings the unit cost down to $17.90 per donated book from the original unit cost (found by
The Inglis University Library Donations Department Part 1 (Memorandum to the Chair of the Budget Committee) Date: To: From: Subject: March 23, 2012 Chair of the Budget Committee Yunzheng Zhao, Management Accountant Donations Department’s Request for Additional Funding
After reviewing the budget committee’s analysis, I believe that it made an inappropriate decision in denying the donations department’s request for additional funds. I will examine its decision through a cost-benefit analysis which shows that it may have overestimated the costs of maintenance, and overlooked the benefits of this important department. The budget committee overestimated the unit cost due to missing revenue, improper cost structure, and underestimated capacity. First, based on the cost schedule, the committee overlooked the revenue that the donations department made from its bi-annual book sales. Secondly, they did not separate the fixed cost and the variable cost of books while calculating the total cost. Finally, they overlooked the possible increase in the annual capacity of processed donations that would result from hiring additional employees. To correct these errors, I revised the cost schedules and the income statements for both before and after acquiring additional funds. I decided to use the contribution approach because I believe that it will be more relevant to separate the fixed cost and the variable cost, since they will change the unit cost in different ways following an expansion of the donations department. While calculating the total cost, I believe that it would be more relevant to deduct the biannual book sales’ revenue from the total cost, because the revenue can subsidize this
2|Page
department. For this reason, I used the operating loss (rather than the actual operating expense) to calculate the unit cost of donated books. As shown in Part 2, this method brings the unit cost down to $17.90 per donated book from the original unit cost (found by