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

Total Guest-Day per year = ( 20 guest per night X 65/100 ) X 363 days = 4719 guest days.

Total Number of guests = 4719 guest days / 3 days per guest = 1573 guests

Total Room days = ( 363 days X 13 guests per day ) = 4719 room days

Statement showing the profit under marginal costing

Description	Amount	Amount
Revenue
Charges ( 4719 guest days X R1100 per night )	R5190900
Treatment ( 1573 guests X 3 days X 2 times per day X R200 )	R1887600
Total Revenue		R7078500
Less : Variable cost
Meals = [( R33 + R47.50 + R63 ) X 4719 guest days	R677176.50
Cleaning = ( 4719 room days / 2 rooms per hour ) X R50 per hour	R117975
Towels = ( 4719 guest days X R34.50 per guest day )	R162805.50
Consumables for treatment = ( 1573 guests X 3days per guest X 2 times per day X R106)	R1000428
Total Variable Cost		R1958385
Contribution		R5120115
Less: Fixed Cost
Lease Rent	R2200000
Manager Salary	R300000
Assisstant Manager	R180000
Health Professional ( R135000 X 6 professionals )	R810000
Repair and Maintenance Cost	R280000
Utilities	R290000
Advertising Cost	R65000
Cleaning Cost	R75000
Total Fixed Cost		R4200000
Total Profit		R920115

Answer

1) Contribution per Guest Day = Total Contribution / Total Guest Day = ( R5120115 /  4719 guest days.) = R1085 per guest day

2) Total Contribution = R5120115

3) Contribution as a percentage = ( Total Contribution / Total Revenue ) X 100 = ( R5120115 / R7078500 ) X 100 = 72.33 %

4) Break Even Point in Units

= Total Fixed cost / Contribution per guest day = (  R4200000 / R1085 per guest day ) = 3871 guest days

5) Break - Even Point in Rands

= (Total Fixed Cost / Percentage of Contribution ) X 100 = ( R4200000 / 72.33 ) X 100 = R5806719

8) Margin of Safety in units = ( Current Guest Day - Breakeven Guest Day ) = ( 4719 - 3871 ) = 848 Guest Day

9) Margin of Safety In Rands = ( Total Revenue - BEP Revenue) = ( R7078500 - R5806719) = R1271781

10) Margin of Safety as a Percentage = (Margin of Safety Sales / Total Sales ) x 100 = ( R1271781 / R7078500 ) X 100 = 18%

Note

Please note that there is no information is given in the question regarding the Target Profit. Thus, no target profit in units and in rands cannot be determined. The profit earned and the target profit are different things. The formula to calculate the target profit is provided below -

Target Profits in Units = ( Total Fixed Cost + Target Profits ) / Contribution Per Unit

Target Profits in Rands = [ ( Total Fixed Cost + Target Profits ) / Percentage of Contribution Margin ] X 100