"You Decide": Identify relevant and irrelevant costs and distinguish between them, Journal two paragraph YOU DECIDE: Relevant Decision Making
You are an elected official in a major city that is considering whether or not to move forward with a proposed plan to demolish the city's existing professional sports stadium and build an elaborate new stadium. One of the most difficult aspects of this decision is estimating the new stadium's incremental revenues and costs that would result if it were built.
What specific types of relevant revenues and costs would you consider in making this important decision?
There are many stadium events for which the associated relevant revenues and costs must be estimated accurately if the correct decision is to be made. These stadium events (and their relevant revenues and costs) include:
Main attraction sporting events (e.g., ticket revenues from baseball, basketball, and/or football games for which the stadium would be built; additional staffing, cleanup, and insurance costs)
Concessions and other sales (e.g., contribution margins or fees earned from product and service sales-most new stadiums boast as many high-end shopping opportunities as an upscale mall!)
Television contract terms (e.g., the amount and percentage of revenue brought in byadditional games being televised in the new stadium, perhaps in primetime slots)
Offseason events (e.g., the ticket revenue from boxing matches, music concerts, etc.).
For this relevant stadium decision, estimating the relevant revenues might be even more difficult than estimating the relevant costs. For instance, projecting how many more people will want to attend games in a new stadium can be unclear, as well as how much money they would be willing to spend for various seats located around the stadium.
Several New York City area stadiums experienced tremendous difficulty in accurately estimating these same items. For example, the New York Yankees and New York Mets organizations built new stadiums with price tags of over $1.2 billion and $800 million, respectively! However, in the new Yankee stadium, many of the more expensive seats-the ones behind the batter and, thus, most visible on television-remained empty because of their hefty $2,500 per seat price tag. In fact, the Yankee organization decreased some of its highest ticket prices by 50% during the stadium's first season in an attempt to fill these high profile empty seats. In other words, decision makers struggled to estimate the amount of incremental revenue that would result from some of the more important seats in a new Yankee stadium. Undaunted by such challenging relevant analyses, however, the New York area also built a $1.6 billion new Meadowlands Stadium to be shared by the New York Jets and New York Giants.
In addition to the previously mentioned relevant items, some citizens raise objections to such large amounts of money being spent on replacing existing fully functional sporting facilities with gargantuan sports palaces. They argue that $1 billion could be better spent on different causes. Such sentiments, whether you agree or disagree with them, represent potentially important qualitative factors that effective managerial accountants should take into account when performing relevant analyses for proposed new stadiums, especially when these citizens represent tax payers or potential fans the stadium builders count on for purchasing expensive tickets in the future.
When making such an important decision, relevant costs for things like sporting events, concessions, television contracts, and off-season events must be considered in addition to qualitative factors like citizen sentiment.