Question

You are the management accountant at one of the famous NWR resorts offering special packages for holidaymakers. Accommodation facilities are in the form of chalets with a capacity of five (5) family members per chalet. For the whole month of December 2019, it hosted 300 holidaymakers, which is only 95% of full capacity, and all Chalets were fully occupied. Package 1 has a daily rate of N$ 120.00 per person, Package 2 has a daily rate of N$ 200.00 per person, and the sales mix ratio is 60:40, respectively. Monthly variable costs are N$ 350 000 for package 1 and N$ 400 000 for package 2 with combined fixed costs of N$ 300 000.

Due to the Covid-19 impact on the tourism industry, revenue is projected to decrease by 30% and variable costs by 15%. Using the same information, how much revenue will be required to break even in the next month?

(NB: Round-off to the nearest whole number)

Select one:

a. N$500 000

b. N$352 020

c. N$600 000

d. None of all

e. N$750 000

Answer 1

Solution:

Break-even is a measure where a business' total revenue and total costs are equal. Total revenue includes both fixed and variable costs. So, at Break-Even Point,

Total Revenue = Fixed Costs + Total Variable Costs

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In the given problem, we note,

NWR Fixed Costs in December 2019 = NS 300,000

So, NWR Fixed Costs in January 2020 = NS 300,000 (Same as Dec)

NWR Total Variable Costs in December 2019 = Variable Cost for Package 1 in December 2019 + Variable Cost for Package 2 in December 2019 = NS 350,000 + NS 400,000 = NS 750,000

NWR Total Variable Costs in January 2020 = 85% of NWR Total Variable Costs in Dec 2019 = 0.85 * NS 750,000 = NS 637,500

So, NWR Total Costs in January 2020 = NWR Fixed Costs in January 2020 + NWR Total Variable Costs in January 2020 = NS 300,000 + NS 637,500 = NS 937,500.

As per the concept explained above, if NWR has to achieve BEP in January 2020, then its Total Revenue in January 2020 should be equal to its Total Costs in January 2020 which is NS 937,500.

So the correct answer is OPTION D - None of All.