This is an excerpt from Sport Finance-3rd Edition by Gil Fried,Timothy DeSchriver & Michael Mondello.
As highlighted in chapter 3, a business needs to plan for various expenses. Expenses can include office supplies, raw inventory, facility costs (from mortgages to electrical bills), corporate perks such as season tickets, and an endless number of other expenses. Given the complexity within some organizations, categorizing every dollar spent by a business is difficult because some expenses are grouped into a generic category called general expenses instead of being recorded separately. General expenses for a sport-related business can be highly diverse, as seen in the next Concepts Into Practice example using Speedway Motorsports.
One question often raised relates to ticket prices and player salaries. For example, what effect did the Los Angeles Angels' 2011 signing of free agent Albert Pujols have on ticket prices? Player salaries are a fixed expense—at the start of the season, the team knows what its total salary obligation will be except for possible bonuses and reductions in salaries if players are injured, cut, or traded. Furthermore, the team can then predict other expenses based on their level of salary expense. Similarly, the team can determine the potential revenue from broadcast rights, luxury seating, and sponsorship income. Considering these potential income areas, the team can examine how much it might need to charge ticket holders to ensure that it can cover its costs. Thus, expenses have a direct effect on prices of various items, from tickets to concessions.
We all know basic costs such as the price of going to McDonald's and spending $5 for a meal. When you do this, the cost to you is $5. If you earn $10 per hour, you can calculate your cost as 50% of your hourly wage. On the basis of an eight-hour day, you could calculate your $5 meal as 6.25% of your daily wage. Cost analysis is similar for a sport business.
Read more from Sport Finance, Third Edition by Gil Fried, Timothy DeSchriver, and Michael Mondello.