midterm on budgeting and financial analysis

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BARUCH COLLEGE, CUNY FALL 2021

MARXE SCHOOL PAF 9140/PATHAK

Budgeting and Financial Analysis

Midterm Exam

Maximum Grade: 20 points; Due 11.59 PM, October 17, 2021

Submit through the Submission Link on the Blackboard

INSTRUCTIONS

a. This exam is made up of two sections. Section I is comprised of four short descriptive

questions and Section II is comprised of three problems that involve calculations.

b. Submit answers in a word or pdf file (no JPEGs please). You may paste photos of your

work in word file. You may also use Adobe Scan or other scanning apps.

c. You may attach excel to show your work, but I won’t grade excel. If you decide to use excel

for some calculations, please copy the formula to the answer-sheet.

d. If you write the final answer without showing your steps or excel formula, you may not

receive the full grade.

SECTION I –SHORT ANSWERS (TOTAL – 8 POINTS)

1. A political scientist and a budget analyst walked into a bar. The political scientist makes

an argument that the budget-making process is ‘all’ about politics. The budget analyst, on

the other hand, argues that politics is an important part of the process, but the budget

process has four key steps, and some of these are less political than others. Which four

steps in the budget cycle is the analyst referring to? Explain each step in 1-2 lines. Also,

briefly mention which steps you think are influenced relatively more by politics. (2 pts)

2. In one or two lines each, explain various kinds of costs that we have discussed in the

class: (a) fixed cost, (b) variable cost, (c) total cost, (d) average total cost, (e) marginal

cost, (f) direct cost, (g) indirect cost, (h) opportunity cost. (2 pts)

3. During this semester, we have discussed several approaches to budget making. Briefly,

summarize the following three budgeting approaches. (2 pts)

a. Performance budgeting

b. Zero-based budgeting

c. Participatory budgeting

4. In his 1959 book, The Theory of Public Finance, Richard Musgrave conceptualized the

problem of public finance into three key branches and outlined the role of government in

the economy. List the three main roles of government in the economy as outlined by

Musgrave, and summarize each in 2-3 lines. (2 pts)

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SECTION II – BUDGET APPLICATIONS (TOTAL –12 POINTS)

5. Breakeven Analysis for Lexington Academy

In a recent report (http://seachangecap.org/wp-content/uploads/2019/03/Closing-the-Gap-

A-True-Cost-Analysis-March-2019.pdf), Seachange Capital Partners – a consultancy that

works with several nonprofits in the NYC area notes:

“New York City is now embarking on an ambitious plan to promote quality

early childhood education through the establishment of a unified contracted

early childhood education system managed by the New York City

Department of Education (DOE). A key part of the City’s work to promote

early childhood education will be new procurements of all contracted early

childhood education programs... These new procurements represent the

largest reorganization of early childhood contracts … and the continuation

of the most rapid expansion of contracted early childhood programs since

the City began contracting with settlement houses and other community-

based early childhood programs during the mayoralty of Fiorello

LaGuardia.”

Under the new program, assume that the NYC DOE has decided to provide a per-

student contribution, and the costs associated with providing the services for

“Lexington Academy” are listed below across the three programs: Pre-K for All,

Headstart, EarlyLearn. The table shows the common expenses and costs for each

of three units within the Academy that provide services to kids of different ages.

a. After reading the entire question, identify the mission centers (0.5 point)

b. Fill up the box below. Classify the costs you see in Table 1 into these boxes

(just their names, not the amounts!) (0.5 point).

Fixed Costs Variable

Costs

Direct Costs ???? ???

Indirect

Costs ??? ???

c. Lexington Academy maintains data for each line item by all three units in

the organization. However, the information about total spending on

“Management and Payroll” and “Building Maintenance and Rent” is

available for the entire organization. Convert these indirect costs to direct

costs for each mission center using “Number of Teachers” as the cost

allocation factor for “Management and Payroll” (not their salary!) and

“Number of Classroom Used” as the Cost Allocation Factor for “Building

Rent and Maintenance.” (2 points)

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d. Assume that each teacher is paid $55,000 and each kitchen staff is paid

$35,000. The organization considers these as fixed costs since they are not

hiring more people. The spending on Kitchen and classroom supplies

depends on the number of kids and data is available monthly. Given the

DOE contribution in the table (price), calculate the breakeven quantity or

number of kids that each mission center should enroll to achieve zero

funding gap. (3 points)

Table 1: FY 2021 – Expenses for Lexington Academy

Management and Payroll

$362,902

Building Rent and

Maintenance

$72,144

Pre-K for

All

(4-5 year

olds)

Headstart

(3 year

olds)

EarlyLearn

(0-3 year

olds)

No. of Teachers ($55,000

each) 4 3 2

No. of Classrooms Allocated 3 2 1

Kitchen Staff ($35,000 each) 1 1 1

Monthly Kitchen Supplies

Per Student $42 $36 $23

Monthly Classroom Supplies

Per Student $32 $26 $17

DOE Contribution Per

Student Per Year

$6,700 $6,200 $5,200

Note: (a) Use DOE contribution as “the price” in the calculations. (b) Both of the variable costs are

available monthly, convert them to annual.

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6. Utility Company Settlement

In July 2021, New York State Reached a $86 million settlement with utility companies

for failures during natural emergencies and inadequate emergency response plans

https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/ny-

utilities-to-pay-86m-in-settlements-over-isaias-storm-failures-65516667. Assuming that

Con Edison was required to pay a total $80.0 million for Isais response failures and steam

outages of 2018 and Central Hudson would pay $2 million, and Frontier Inc would pay

$4 million in the settlement. They were offered two choices (a) immediate payment of 90

percent of the total liability or (b) immediate payment of 40 percent of the liability in

October 2021, and 20 percent paid during the last quarter of next three years (October

2022, October 2023, and October 2024). Assuming a discount rate of 12 percent, which

alternative should EACH of these companies choose and why (show your steps)? (3 pts)

7. The Cost of Hy-Flex Classroom

Baruch College intends to hire a vendor to facilitate the upgrade of vertical campus

classrooms to HyFlex to facilitate more integration in online and in-person instruction.

The project intends to install new cameras, microphones, screens, and projectors in the

classroom that could be used to create seamless livestreams and two-way communication.

Two companies have submitted the bids as shown below: Jobs Inc. has quoted a lower

installation cost and higher maintenance cost per classroom, while the Gates Inc. has

quoted a higher installation cost and lower maintenance cost. Which option is better from

Baruch’s perspective assuming a discount rate of 8 percent and taking into account the

time value of money? (3 pts)

Jobs Inc. Gates Inc.

Installation Cost

(Paid in October 2021) $ 20,000 $27,500

Maintenance Year 1

(Paid in October 2022) $7,000 $4,500

Maintenance Year 2

(Paid in October, 2023) $7,000 $4,500

Maintenance Year 3

(Paid in October, 2024) $7,000 $4,500

Total $41,000.00 $41,000.00

(Note: You do not need excel to solve this. However, if you want to use excel you can also do that.)