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Making Fixed Costs Easy to Understand Using Sport Examples
Making Fixed Costs Easy to Understand Using Sport Examples
Posted May 27, 2019
By Mat Israelson
5/27/19 |
6 MIN READ

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Running a sport franchise or non-profit sport organization are different, but there are constants that run between both. While users reap the benefits, individuals behind the scenes are attempting to measure costs. There are two types of costs, variable and fixed, and in this article, we’ll focus on fixed costs and dive into some examples of fixed costs.

Fixed vs Variable Costs

Before diving exclusively into fixed costs, it’s important to understand the differences between the two. Fixed costs are costs that do not change with the amount of output produced. One example of a fixed cost is the lease due on the stadium your favourite sports franchise calls home. They can sell out every game or play in an empty stadium, the lease cost is the same every year.

Conversely, a variable cost is the electricity it takes to power the stadium. During the offseason, power usage diminishes compared to the peak, where thousands of people require proper lighting and sanitation. The electricity is a variable cost because the final price will depend on how much it is used.

READ MORE: Why Financial Management Matters for Sport Management Students

Identifying Fixed Costs

Let’s use an example where you are hosting a Superbowl party (sport-related) to illustrate how/why some costs are fixed.

In order to illustrate what a fixed cost is, let’s look at an example that many of us sport pros can relate to. Let’s have a Super Bowl party! It’s you and 3 friends. You’re all HUNGRRYYYY.

Examples of fixed costs and expenses in sport

One of your friends, Hunter, says, “Let’s order pizza!” So you order a large pizza from your favorite pizza place. It costs $12 for it.

The cost of the pizza is $12. It isn’t going to cost more for the pizza if another friend joins your party and eats a leftover slice. The cost of the pizza is therefore fixed.

The total cost of the pizza isn’t going to change if:

  • There are leftover slices (because only two of you ate it, what a waste!); or
  • The entire pizza is eaten (all because the extra friend devoured the remaining piece).

When running any sort of sports business or franchise, identifying your fixed costs can truly help you build a budget. These are costs that will never change, no matter how the environment shifts.

Properly forecasting and budgeting within sport is critical because there are many items outside your control. Those items include attendance or merchandise sales. Fixed costs give you a base to build your budget because you will know the bare minimum to work from.

Let’s look at another example to calculate your fixed costs. Suppose your building lease is $1,000 and your employees cost $1,000 a month. As a result, you know, at a minimum, you need $2,000 in revenue to cover these fixed costs.

Examples of Fixed Costs for Common Types of Sport Organization Explained

So far, we have covered some basic examples of fixed costs to help familiarize you with the general concept. Let’s now look at some more specific examples of how these fixed costs play out in the world of sport.

Service Sport Organization

First, let us look at the service aspect of a sports organization; we’ll use an Ontario Hockey League (OHL) team as our example to discuss fixed costs. There’s a dedicated team doctor and dentist at every OHL game. This costs money! For this type of sport organization, the fixed costs in the servicing area include medical staffing. It will cost them a fixed amount to hire a complete medical staff for the year.

Now, suppose you are in charge of managing the budget for a pro sport team for example. One of their biggest fixed costs are player salaries.

Take the example of the Los Angeles Angels of Anaheim. They Angels signed Mike Trout to a record breaking contract extension on March 20th. Here’s a breakdown of the fixed costs the Angels are slated to incur for the next 12 seasons. Meanwhile, it should be noted that Trout received a $26.72 million CDN bonus for signing the deal. So we’ve left that out of the 2019 figure.

Examples of fixed costs and expenses in sport
Year Amount (CDN Dollar)
2019 21.38 million*
2020 48.10 million
2021 47.36 million
2022 47.36 million
2023 47.36 million
2024 47.36 million
2025 47.36 million
2026 47.36 million
2027 47.36 million
2028 47.36 million
2029 47.36 million
2030 47.36 million

Assuming there were no milestones or aspects related to how he performs, these figures show a large fixed cost for the Angels over the next 12 years. In other words, these costs do not change with the number of home runs, RBIs, runs scored, stolen bases, etc. Trout has at the end of the season. They also stay constant no matter how many games the team wins/loses. Thus, the Angels need to pay Trout these amounts, unless he gets injured, mutually bought out, or traded.

Another example of a fixed cost here is the maintenance staff. You know that it will cost a fixed amount to hire your core group of individuals to maintain the arena both during and after the season.

Manufacturing Sport Organization

Second is the manufacturing aspect of a sports organization. Items that are fixed include the material needed to generate goods. These will remain fixed no matter how many items are produced. In addition, the labor associated with the manufacturing process is fixed. For example, if you are working in a factory producing sport jerseys, the number of workers needed to create the jerseys is a fixed cost.

Merchandising/Retail Sport Organization

Third is the merchandising aspect of the sports organization. The fixed costs include the purchase of jerseys and other items to be sold in the shop or online. Another fixed cost is the locations these products are being sold, i.e. the rent and taxes associated.

Non-Profit Sport Organization

Non-profit organizations, such as Erin Mills Soccer Club, are quite popular. Even though they are non-profit, fixed costs are vitally important to their budgeting.

There are many examples of fixed costs in non-profit sport organizations. Fixed costs for a non-profit include salaried individuals. In the case with Erin Mills Soccer Club, other fixed costs include the soccer field leases, taxes, and any trophy costs for the league. Fixed costs are important, too, to ensure they have enough cash flow to fund the organization for the year.

Discretion When Incurring Fixed Costs

Fixed costs are locked in. You cannot change them once they are agreed upon. That’s why baseball teams are very wary of giving long-term contracts and lucrative contracts to players they think may not perform.

For example, if the Blue Jays signed the next best hitter in the game for a 10-year $100 million deal, this would mean the organization must set aside the annual costs to cover his contract. In other words, good or bad, high or low attendance and revenue, the organization must pay the player.

In an example you’ll see in a moment, an organization may structure a deal to include certain clauses, making the end result different than the budgeted amount. While this is a fixed cost, it can potentially fall under two different types of fixed costs.

Two Types of Fixed Costs

There are two types of fixed costs to identify within your business, and those are committed and discretionary.

Committed

The first is a committed fixed cost, which is long-term and cannot be significantly reduced in the short term. As mentioned in a previous example, this would the deprecation of buildings and equipment. Also included are your taxes and lease payments. Committed costs need to be discussed in great length before committing because while they can change, it can take up to several years before those changes are realized.

Discretionary

The second type of fixed cost is a discretionary fixed cost. A discretionary fixed cost may change in the short-term by current managerial decisions. Items that fall under this description include your marketing department, as well as research and development.

Examples of Fixed Costs in Sport

Fixed Cost Example #1: Player Salaries

Back in early 2016, Jose Bautista was in the news for his contract. His asking price was $150 million for a 5-year extension. This cost can be negotiated to have certain clauses within them. Furthermore, there are typically incentives, meaning if Bautista were to hit a certain number of home runs, he would earn additional money.

However, it was known that Bautista’s eyes were declining in health and his career was on the downhill. So instead of a fixed contract, he was offered a variable contract, giving the organization flexibility around the known variables. While this is still a fixed cost within the organization, it’s discretionary because it is subject to change.

Fixed Cost Example #2: Local Youth Hockey Tournament

Let’s look at how these fixed costs work together. Take your local youth hockey tournament for example.

In order to run this tournament, you know the following:

  • $90 tournament entry fee
  • $250 insurance for First Aid
  • $1,000 flat arena rental cost
  • $50 for tournament MVP trophy
  • $100 for customized first place banner.

From this, you can calculate a budget that will give you exact numbers needed to properly budget for this event.

Discretionary fixed costs for the hockey tournament could include certain concessions and merchandising, as well as advertising and marketing.

The Gist on Fixed Costs

Understanding fixed costs are an effective way to build a solid base your organization can function off of.

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