Assignment 1 Question 1 (35 marks)

Kids Play Ground (KPG) is an entertainment centre based in Windhoek. The entertainment centre operates for 30 days in a month. The management accountant of KPG has extracted the following information from the companys forecasts of the coming month:

Customers/Package Price per customer/package (N$) By booking customers (sold at a discount) 1 500/day 290 Normal customers 8 000/day 390 Premium package (family of 4) 675/day 1 850

Costs

The fixed costs for the coming month are estimated to be N$ 65 000 000 while the variable cost per person will be N$125. Pricing

Customers opting for the by-booking option and the normal customers will not be permitted to exceed the numbers given above. All customers are expected to turn up and use the facility. Customers opting for the premium package are given preference to be on the front of the queue at the centre. The price for the package has been set at N$1 850 to ensure profit maximization from the sale of the package. Market research shows that for every N$50 increase in price of the package, the demand will reduce by 25 packages and for every N$50 decrease in price, the demand will increase by 25 packages. There is ample capacity at the centre to accommodate the premium package at any level of demand. Four (4) people will always be admitted for every premium package sold.

The demand for each of the group of customers is independent of each other.

The pricing equation is P = a - bx, while the profit maximizing equation is MR = a - 2bx

Equipment to be hired

The centre is proposing to hire some equipment for use in issuing tickets to customers for the coming month. It is anticipated that as a result of this proposal, fixed costs will increase by N$2 500 000 for the month. However, the variable costs per person are anticipated to reduce by 8% as a result of hiring this equipment.

Required Marks

Sub-

total

Total 1.1 Advise KPG on whether they should hire the ticketing equipment bearing in mind the reduction in variable costs and the impact it will have on the price charged for the premium package. 30 30 1.2 A competing entertainment centre has started offering discounts and this is anticipated to continue into the forthcoming month. This development is likely to reduce KPGs normal customers. If KPG is not able to reduce the price charged to normal customers, calculate the sensitivity of the decision to hire the ticketing equipment to a change in the number of normal customers per day. 5 35 Total 35