The rodeo lost $8326 in its first year, and there are a number of different options on the table for improving the profitability next year. One of the options includes the creation of two more major sponsor slots that would be used to offset some of the costs that the organizing committee incurred in the first year. One of the largest costs was $3341 for the contestant hospitality tent, and this could be offset by a major sponsorship slot, which would only cost $48 for a sign. This would deliver a net gain to the bottom line. However, it would not make the rodeo more profitable next year, and the gain would only mean that the rodeo would lose $5003 next year, all other factors being equal.
It is nevertheless recommended that the rodeo should create two more major sponsor slots, and use these to offset key costs. It is recommended that one of the new major sponsorship slots should be used for Shady\\'s Bar-B-Q as this would offset $3341 worth of costs, improving the profitability. Given that major sponsorship slots were worth $600 this past year, and Shady\\'s is willing to go in for one of these on costs of $3341, this indicates that major sponsorship slots were underpriced in the first year. Shady might be selling at its costs (which would be lower than what the committee paid last year), but still this means that the value of the major sponsorship is at least $1000.
The organizing committee might not be able to increase the price of the other major sponsorships to that level, but this figure points to the lack of value in using The Fun Shop\\'s tent. The tent would offset the $600 value of the arena, which is at best fair value. But if major sponsorships were underpriced, and a tent would require higher port-a-potty fees (arenas have washrooms already, but a tent would not, so there will be a need to rent more port-a-potties), then the value of the Fun Shop\\'s offer is actually less than $600, or less than the value of a major...
Therefore, the Fun Shop\\'s offer should not be accepted.
My answer would be different if there were limits on the number of signs in the arena. I would still accept Shady\\'s offer, because it has the highest-value offer on the table for a major sponsorship slot. This would mean that one of the previous year\\'s major sponsors would be unable to obtain a major sponsorship this year. The decision with respect to Fun Shop would not change, either. This illustrates that the opportunity cost changes if there is a limited amount of space for signage, but that we should still take the highest-value offer for the two major sponsorship slots that are available.
The cost that is not found on the financial statement is the opportunity cost. If there are only a few sponsorship slots available, that creates a situation where the organizers have to make a trade-off between the costs of each sponsorship, and only accept the two highest-value sponsorship opportunities. If, however, there are no opportunity costs, then the organizers should instead seek to maximize the sponsorship total value by offering as many sponsorships as possible for the event.
Even with changes to the sponsorship, the rodeo will still not be profitable next year, if nothing else changes. Thus, there needs to be more changes made. If I am the elected chair of the committee, I would suggest that there are greater controls on the gates, to ensure that all patrons at the event are paying customers.…