For the new year only, should kumatima.com buy the 1-year maintenance plan for its existing fleet, or should it pay as and when there is a need to service (pay-as-you-go)? (8 marks) Show all workings (workings 7 marks; conclusion 1 mark).

kumatima.com is South Africa's largest low-cost airline and operates only within the country. The business was launched with only two aircraft, and it took to the skies on 2 July 2014, operating between Cape Town and Johannesburg. The fleet of aircraft has now increased to 25 and operates flights to and from Cape Town, Durban, East London, George, Gqeberha and Johannesburg. Since kumatima.com's entry into the market, it is reported that the average cost of flying for the general public has been reduced by 30% and this has meant a shrinking demand for bigger international airlines which normally charge high fares for travel. Prior to the Covid-19 outbreak, kumatima. com had reported very low profits due to high costs usually incurred in the first few years of operation and low demand. The executive management team had previously projected an increase in profits from the 2021 financial year, however, travel restrictions introduced during the lockdown resulted in significant losses made by the company in the 2021 and 2022 financial years. The company has not paid its employees' salaries for the last two months of the 2022 financial year (the executive management team's salary payments are kept up to date as the company fears losing top talent to its rivals, should team members resign because of non-payment of salaries). As the company battles to return to profitability, it has become apparent that without capital injection and an increase in the number of passengers, kumatima. com will have to file for business rescue or, at worst, bankruptcy. From the projections provided by kumatima.com's management accountants, the company will return to profitability within weeks, provided that capital of R400 million is injected. A significant increase in domestic travel is anticipated both in the short and medium term, as the result of an expected decrease in fuel prices, the approaching summer season and fewer competitors going forward. Fifteen percent (15%) of the capital required will be used to bridge working capital requirements and the remaining balance will be invested in one of the two capital projects currently evaluated. A. WORKING CAPITAL REQUIREMENTS (fleet servicing) kumatima.com is already months behind on its short-term obligations (salaries and other payables) and needs additional funds to source enough jet fuel and pay for monthly operating costs. Most of these costs cannot be easily restructured as the company usually enters into long- term contracts with the relevant parties. However, kumatima. com is considering restructuring its aircraft maintenance contracts in order to save money. Based on an analysis performed recently, the following are probabilities of the number of services to be conducted in total on the fleet of 25 aircraft for a year (routine service takes place every 1-3 days): Total number of services Probability 4 400 50% 8 900 20% 3 400 30% The two options available to kumatima. com are presented below:ption A: Pay-as-you-go maintenance {service} Under this option, kumatr'macom will only pay for the service done on each aircraft that goes in for maintenance. The recent analysis performed was mainly focused on this option [and kumatr'macom has to make payment of REID non for this analysis to the consultant within the next 3f] days). The average cost of one service is estimated at R36 50D. This option requires intense administration to ensure that services are done on time and that the availability of resources and parts is also conrmed timeously. As a result, one fulltime senior administration clerk currently working in Operations Department will be required to spend 20% of his time managing the maintenance schedule under this option. He currentiy earns R500 {l per annum. Dption B: 1-year maintenance {service} plan kumatr'macom has in the past entered into a xed yearteyear contract with Airmotion (Pty) Ltd {also referred to as "Alr-nntion") to service its entire eet. However, there are concerns that this may not be as cost effective as Option A above [payasyougo maintenance]. Although the contract is signed upfront, payment is only made at the end of the contract term. kumatr'mapom has recently paid Airmotion Rl million under last year's contract (inclusive of RB million relating to late interest charged from the previous year}. As kumatrmacom is one of its highly valued clients, Airmotion always gives kumatimecom its Airmotion branded headphones to the fixed value of R1 ,25 million at no extra charge [the headphones are then sold to passengers to use on board at the same value]. At the end of each year, kumatimacom has no headphones left in stock. Air-motion's contract price increases by 4% year on year