Question

Naledi Uys has just return from a long break at a health spa in Zanzibar. Although her previous experience has been in the restaurant business, she is currently considering the possibility of setting up her own health spa in South Africa. She has an idea of the costs involved but needs to put together a business plan to present to her bank manager so she can secure the necessary funding.

As her friend, she has asked for your help and given you the following estimates of costs and revenues:
She has identified a suitable property that is currently being used for similar purpose. The cost of the lease will be R2, 200 000 per annum.

The spa would be managed by a full-time manager who will be paid R300,000 per annum. He will be assisted by an assistant manager who will be paid R180, 000.
There will also be 6 full time health professionals trained in various disciplines, each earning R135, 000 per annum.
Repair and maintenance costs for the spa are estimated at R280,00 per annum.

The utilities (water and electricity) are expected to cost R290, 000 per annum.

Advertising will cost R65, 000 per annum.

The cost of breakfast is expected to be R33 per guest per day, lunch R47.50 per guest per day and evening meal R63 per guest per day.

Naledi will employ local people to work as cleaning staff. They will be paid R50 per hour, is expected that a cleaner will be able to clean 2 rooms per hour and each occupied room will be cleaning daily. The main spa areas will be cleaned by part time staff, at a budgeted cost of R75 000 per annum.

Towels and robes will be supplied to each resident. A clean set will be provided every day. The cost of this is expected to be R34.50 per day guest.
Each treatment involves some consumables, and these are estimated to cost R106 per treatment.

REVENUES
It is proposed that the price charged will be R1, 100 per night, although Naledi feels that the market could absorb a higher price. This price would be for use of the fitness facilities, all meals (breakfast, lunch, and dinner), and clean laundry. Any treatments would be charged in addition to this.

Treatment will be charged at R200 each. It is expected that guest on average will choose to have 2 treatments per day of their visit.

The spa will be able to accommodate 20 guest per night. It is expected that the spa will operate 363 days year and on average will achieve 65% occupancy. The average stay of a guest will be 3 night.

Required
Calculate the following CVP formulas
1.1Contribution per unit
1.2Total contribution
1.3Contribution as a percentage (contribution ratio)
1.4Break-even point in units
1.5Break – even points in rand’s
1.6Target profits in units
1.7Target profits in rand’s
1.8Margin of safety in units
1.9Margin of safety in rand’s
1.10 Margin of safety as a percentage (margin of safety ratio)

Answer 1

OUT OF 10 SUB PARTS ONLY FIRST 5 ANSWERED:

Workings:

Ans1.1

Per Unit taken as Per Guest day

If per unit is interpreted as per unique guest then it will be = 885*3=2655 as each guest on average stays for 3 days.

Subsequent parts have been answered using per guest day concept.

Ans-1.2

Total Guests expected  = Per night capacity * Working days in a year * Occupancy % = 20 * 363 * 65% = 4719

Total Contribution = 4719 * 885 = 4176315

Ans-1.3

Contribution Percentage = 885/1300 = 68%

Ans-1.4

Breakeven point in units = Total Fixed Costs / Contribution per Guest day = 3948000 / 885 = 4461

Ans-1.5

Breakeven point in Rands = Fixed Cost / (1-Contribution Margin%) = 3948000 /(1-0.68) = 12337500