Question

The

SunriseSunrise

Group

(SGSG )

is an environmentally conscious organization that buys land with the objective of preserving the natural environment.

SGSG

receives private contributions and takes no assistance from the government. Fixed costs of operating the organization are

$ 1 comma 000 comma 000$1,000,000

per year. Variable costs of purchasing the land (including environmental impact reports, title searches, etc.) average

$ 3 comma 000$3,000

per hectare. For the next budget year,

SGSG

expects to receive private contributions totaling

$ 19 comma 000 comma 000$19,000,000.

All contributions in excess of costs will be used to purchase land.

Requirements

1.	How many hectares will SGSG be able to purchase next year?
2.	SGSG is considering participating in a new government program that will provide $ 1 comma 000$1,000 per hectare to subsidize the purchase of environmentally sensitive land. If SGSG participates in this program, it estimates the organization will lose $ 5 comma 000 comma 000$5,000,000 in contributions from supporters who believe that accepting money from the government is not consistent with its mission. If SGSG does participate in the program, and its forecasts are accurate, how many hectares of land will it be able to purchase? On financial considerations alone, should SGSG participate in the government program?
3.	SGSG is worried that contributions may decrease by more than the $ 5 comma 000 comma 000$5,000,000 it has estimated if it takes the subsidy. By how much can contributions decrease for SGSG to be able to buy the same amount of land if it takes the government subsidy or rejects it? (i.e., what is the point of indifference between the two options?)

Answer 1

Solution:-

1. How many hectares will SGSG be able to purchase next year:-

6,000 hectares

Explanation:-

(Total contribution in next year - fixed cost) / variable cost per hectares

= (19,000,000 - 1,000,000) / 3,000

= 6,000 hectares

2. If SGSG does participate in the program, and its forecasts are accurate, how many hectares of land will it be able to purchase:-

6,500 hectares

Explanation:-

(Total contribution in next year - fixed cost - Contribution lost) / (variable cost per hectares - Subsidy per hectares)

= (19,000,000 - 1,000,000 - 5,000,000) / (3,000 - 1,000)

= 6,500 hectares

On financial considerations alone, should SGSG participate in the government program:-

Yes, due to able to purchase excess hectares of land.

3. By how much can contributions decrease for SGSG to be able to buy the same amount of land if it takes the government subsidy or rejects it:-

500 hectares * 2,000

= 1,000,000.