Question one:

Mr Zoo is planning to set up a mini Zoo in Howick.

The following relates to different pricing plans of visiting the zoo and costs of running the zoo.

Pricing Plan 1 – K30 per person (a special pack will be included)

Pricing Plan 2 – K25 per visitor (the special pack not to be included)

Variable Costs per visitor

Special Pack – K8

Zoo Consumables – K7

Zoo Expenses – K2

Total Fixed Costs – K200,000

REQUIRED:      Study the information above then answer the following questions.

Using the CVP formula, calculate the number of units (and its KINA amount) for achieving

Breakeven

A profit of K30,000 for both plans.

Calculate the Contribution Margin ratio for both plans.

Describe the meaning of Contribution Margin ratio.

Explain the relationship between Contribution Margin ratio and Number of Breakeven units.

Explain why it is important to calculate Margin of Safety.

State TWO examples of fixed cost in relation to the zoo.

Define Relevant Range.

Draw a CVP graph and identify the following on the graph (CVP graph template will be provided):

Breakeven Point

Profit Zone

Loss Zone

Write a report to Mr Zoo for recommending which pricing plan should be adopted.  Your recommendation should include at least ONE piece of financial and ONE piece of non-financial information.

QUESTION TWO

Firm and Fun Accounting School teaches students how to become a good accountant.  The following relates to the income and costs analysis for the school:

Fees charged

Senior Accounting Class – K50 per class per student

Junior Accounting Class – K30 per class per student

Costs

Resources – K100 per senior students, K75 per junior students

Teacher – K25,000 per annum (there are 2 teachers in the school.  One for senior classes, one for junior class)

Class Consumables (such as whiteboard markers, worksheets) – K70 per student

Administrative Expenses – K30,000 per annum

Finance Costs – K7,000 per annum

There are 40 lessons in a school year for both senior and junior levels.

Suppose there are 50 senior students and 40 junior students enrolled.  Each class is made up of 8 students and school fees are not refundable.

REQUIRED TO ATTEMPT AND ANSWER:

Part A – So Easy

The school plans to accept only senior students next year.  The administrative expenses will drop down to K25,000 per annum.  The resources per class will increase to K110 per unit because less amount of bulk buying incurred.

How many students are needed in order to achieve breakeven.

How many classes need to be taught in order to achieve breakeven.

Suppose the business wants to achieve K25,000 profit at the end of the year, calculate the number of classes is needed to achieve this.

Calculate the margin of safety (in number of class).  There are 50 students enrolled for next year’s course.

Explain what is margin of safety.

Show the CVP in a graph form (from no student to 70 students) and identify the breakeven point.

Part B – A bit challenging

Using the number of students enrolled to answer the following:

Draw a CVP diagram to show the Total Revenue and Total Costs.

Has the school achieved breakeven?  If NOT, how much revenue is required to achieve breakeven.

Find out how many students (regardless junior or senior students) are required to achieve K25,000 profit.

Calculate the margin of safety ratio using the current enrolment.

Part C – Very Challenging

If you are the manager of the school, would you continue to accept both senior and junior students OR just only senior students (mentioned in Part A).

Use information from Part A and Part B to answer this question.  You should include at least TWO pieces of financial and TWO pieces of non-financial advantages or disadvantages in your answer.