Ethan Freedman
March 3, 2026
Prof. Monica Foote
SOCWT7125: Financial Management
- 4-2: Distinguish among full, direct, and indirect costs.
a. Direct Costs: Direct costs are expenses that are associated with a particular program, service, or cost object. These costs are incurred because of a specific activity, and would not exist if that activity did not occur. Direct costs in nonprofits are typically straightforward and can range from salary of employees to the cost of a service, or supplies. Bowman (2011) reminds us that it is essential in nonprofit finance to be able to identify direct costs for program budgeting, grant reporting, and program evaluation.
b. Indirect Costs: Indirect costs can be called overhead or administrative costs, too, and are expenses that cannot be solely attributed to one specific program and must be shared or allocated across multiple programs or activities. These costs are what support the organization more widely, and are not associated with a single service provided. Some examples of indirect costs might be rent and utilities for a shared office space, legal services, or insurance. Bowman (2011) helps to highlight that things like salaries or the amount of staff on payroll can influence the indirect cost of programs and also relate to the efficiency of a program when looking at a budget. Indirect costs can be a flag for funders, so it is important to justify our indirect costs.
c. Full Cost: Full Cost = Direct Costs + Indirect Costs: Full cost is the total cost of delivering a program or service. It makes up both direct and indirect costs, and represents what it truly costs the organization to carry out a program after accounting for everything. Also called the unit of service, understanding the full cost of a non-profit is pivotal for making decisions, applying to grants, and evaluating the sustainability of a program. The Bowman (2011) chapter shows that ignoring or underrepresenting indirect costs can lead to shortcomings for an organization in their services, programs, and can be super bad for the financial standing of an organization.
- 4-3: Distinguish among average, fixed, and variable costs.
a. Fixed Costs: fixed costs remain constant regardless of the amount of services delivered. Fixed costs are incurred through operating the organization, and do not increase or decrease as the number of clients of units of services change. Fixed costs can include rent, depreciating assets, insurance, and the salaries of staff who support the organization, but may not directly relate to the amount of programs being provided. For nonprofits, Bowman (2011) helps to understand that fixed costs can create financial risk because they must be covered, no matter the revenue of the organization. Fixed costs are crucial for knowing where an organization needs to break even and the level of financial vulnerability.
b. Variable Costs: variable costs change in direct proportion to the level of activity or the output. The more services being delivered, the more the variable costs increase, and with fewer services, vice versa. For a healthcare nonprofit, variable costs could be the medical supplies per patient, food costs for meals served, or transportation costs (like our bus example in class, too). Fixed and variable costs are important to differentiate between as recognizing what is what is important for effective budgeting (Bowman, 2011).
c. Average Cost: Average Cost = Total Cost / Units of Service: average cost is also called unit cost, and is the total cost, both fixed and variable, divided by the number of units of service produced. This is important because it answers the question of what it costs the organization on average to deliver one unit of service. Average costs decline as the volume of services increase because they are spread out over more units. Conversely, when volume drops, average costs rise and this can put pressure on the program efficiency.
- 4-30: Millbridge Memorial Hospital provides comprehensive physical exams. The charge per exam is $100, while the variable cost per exam is $65. Thirty percent of patients who come in for exams are private pay. They must pay full change. Seventy percent of the patients are covered by an insurance company that has an agreement with the hospital that reduces the charge by 20 percent. The hospital has $210,000 in fixed costs per year. How many exams must the hospital provide in order to break even?
a. Break Even Analysis helps to show the amount of services at which the total revenues equal the total costs, and do not correlate with a surplus or a deficit. This requires finding the average revenue per exam for the Millbridge Memorial Hospital before we can look for the contribution margin per exam and then the break even amount.
b. Information given:
i. Charge per exam: $100.00
ii. Variable cost per exam: $65.00
iii. Proportion of private paying patients: 30%
iv. Proportion of insurance paying with a 20% discount: 70%
v. Insurance reimbursement rate (80% of 100): $80.00
vi. Annual Fixed Costs: $210,000
c. Average Revenue per exam:
i. Average Revenue = (0.30 x $100) + (0.70 x $80)
ii. Average Revenue = $30.00 + $56.00
iii. Average revenue = $86.00 per exam
d. Contribution Margin per exam
i. Contribution margin = average revenue - variable cost
ii. CM = $86.00 - $65.00
iii. CM = $21.00 per exam
e. Break Even Amount: Fixed Costs / Contribution Margin
i. Break Even Volume = $210,00 / $21.00
- Break Even Volume = 10,000 exams
f. Summary: The hospital must provide 10,000 exams annually to break even. This is because the insurance discount reduces the average revenue to $86.00 and increases the volume required to cover all the fixed costs.
i. Average revenue per exam = $86.00
ii. Variable cost per exam = $65.00
iii. Contribution Margin per exam = $21.00
iv. Fixed Costs = $210,000
v. Break Even point: 10,000 exams
- 4-31: The fixed cost of running a fundraising dinner for Meals for the Homeless are $10,000 and the variable costs are $75 per attendee. The facility where the event is being held can accommodate 500 people. Answer the following questions about the event:
a. Given information:
i. Fixed costs: $10,000
ii. Variable Cost per attendee: $75.00
iii. Facility Capacity: 500 people
iv. For each of the questions, I need to calculate the contribution margin
b. If Meals charged $275 per ticket, how many people would have to attend the gala for the organization to break even at the event?
i. Contribution margin = Price - variable cost
ii. Contribution margin = $275.00 - $75.00 = $200.00 per ticket
iii. Break even = $10,000.00 / $200.00 = 50 attendees
iv. The organization must sell 50 tickets at $275.00 to break even. This is relatively doable given there is a 500 person capacity, and in my eyes, reflects an event that is priced well with a high contribution margin.
c. If meals charged $300 per ticket, what would the contribution margin from each ticket sold be?
i. Contribution margin = $300.00 - $75.00 = $225.00 per ticket
ii. Break even volume = fixed costs / contribution margin
iii. Break even volume = $10,000 / $225.00
iv. Break even = 45 attendees (Rounded up from 44.4)
v. At a ticket price of $300, the contribution margin is $225.00 per ticket and the organization must sell 45 tickets to break even.
d. If 500 people attend the event, how much does the organization have to charge each attendee to earn a profit of $100,000? (assume costs from original problem are still in effect.)
i. Total revenue needed = fixed costs + variable costs + target profit
ii. Total revenue needed = $10,000 + ($500 x $75) + $100,000
iii. Total revenue needed = $10,000 + $37,500 + $100,000
iv. Total revenue needed = $147,500
v. Price per ticket = $147,500 / 500 = $295 per attendees
vi. Fixed costs = $10,000
vii. Variable costs = ($500 x $75) = $37,500
viii. Target profit = $100,000
ix. Total revenue required = $147,500
x. Required ticket price = $295.00
xi. At full capacity of 500 people, Meals for Homeless must charge $295 per ticket to achieve a $100,000 fundraising surplus.
- 4-33: The Helensville Symphony incurs $3,000,000 of fixed cost each year. The variable cost for each person attending one of the orchestra’s performances is $24. If the average charge for a ticket to attend a performance of the Helensville Symphony is $100, how many tickets must it sell each year to break even?
a. Given information:
i. Annual fixed costs = $3,000,000
ii. Variable cost per attendee = $24.00
iii. Average ticket price = $100.00
b. Contribution margin = ticket price - variable cost
i. Contribution margin = $100.00 - $24.00
ii. Contribution margin = $76.00 per ticket
c. Break even volume = Fixed costs / contribution margin
i. Break even = $3,000,000 / $76.00
ii. Break even = 39,473.7 or rounded up to 39,474.
d. Summary:
i. Contribution margin per ticket: $76.00
ii. Fixed costs = $3,000,000
iii. Break even quantity (rounded up) = 39.474 tickets
iv. The Helensville Symphony must sell 39,474 tickets annually to cover its costs.
- 4-34: Millbridge Family Services (MFS) currently operates a foster care program that is fully funded by the state. Changing government priorities are expected to result in a 20 percent reduction in its state foster care funding for the upcoming fiscal year. MFS’d management is considering eliminating the foster care program in the next fiscal year in light of these anticipated funding cuts. The total foster care program expenses for the upcoming fiscal year are $120,000. The foster care program’s budgeted expenses include $25,000 in salaries and occupancy costs that are allocated to its program budget from MFS central administration. These allocated expenses of $25,000 are unavoidable even if the foster care program is eliminated. What is the total relevant cost that should be considered in making this decision?
a. Given information:
i. Total foster care program expenses = $120,000
ii. Budgeted (unavoidable) costs: $25,0000
iii. Expected reduction in state funding = 20%
b. Total Relevant cost = total program expenses - unavoidable costs
i. Total Relevant cost = $120,000 - $25,000
ii. Total Relevant cost = $95,000
c. The relevant cost that should inform the decision to eliminate the foster care program is $95,000. This represents the avoidable costs, or the expenditures that would actually be eliminated if the program was discontinued. MFS management should compare this $95,000 against the expected foster care revenue for the upcoming year (after the 20% state funding reduction) to determine whether elimination produces a net financial benefit.
- 4-36: Millbridge Animal Protective Services (MAPS) is planning its spring awards dinner as a fundraising event. It is planning to charge each attendee $150. Feast Hall, the site of the dinner, will charge MAPS $5,000 for the use of its posh VIP Room and $50 per plate of food. The VIP Room has a capacity of 180 people. Rocky Mount (the band) will provide the entertainment for their standard fee of $1,000 per night.
a. Given information:
i. Ticket price per attendee = $150.00
ii. Feast Hall VIP room (fixed fee) = $5,000.00
iii. Rocky mount band fee (fixed) = $1,000.00
iv. Total fixed costs = $6,000.00
v. Food cost per plate (variable) = 50.00
vi. Venue capacity = 180 people
b. How many people would need to attend the event for MAPS to break even?
i. Contribution margin = ticket price - variable cost per person
- Contribution margin = $150.00 - $50.00
- contribution margin = $100 per person
ii. Break even = fixed costs / contribution margin
- Break even - $6,000 / $100.00
- Break even = 60 people
iii. MAPs must have at least 60 attendees to break even for their awards dinner. With a venue capacity of 180 people, this is one third of the people they can take which gives them a good amount of room to break even and then generate a profit. If below 60, they will net a loss.
c. If MAPS sells 100 tickets for the dinner, what is the average cost to MAPS for each person with a ticket?
i. Total cost = fixed costs + (variable cost x attendees)
- Total cost = $6,000 + ($50 x 100)
- Total cost = $6,000 + $5,000
- Total cost = $11,000
ii. Average cost = total cost / attendees
- Average cost = $11,000 / 100 tickets
- Average cost = $110 per person
iii. At 100 attendees, the average cost per person is $110. Since the ticket price is $150, MAPS earns an average surplus of $40 per person and a total surplus of $4,000 because of (100 x $40). This is something we discussed in class and highlighted in our textbook as Bowman (2011) shows us that when we go beyond the break even point, the average cost falls because the fixed costs become more spread out over more people and the surplus per unit rises. This relationship between amount of services, average cost, and surplus is relevant for non profit planning and encourages organizations to bring in as many people to cover their costs, and generate more funds that can be used for their mission.