The BR District Council raises a considerable amount of their yearly revenue from the tourism industry. One of the tourist attractions is a restored steam railway that carries passengers on a scenic route through the local area and through BR Gorges. The railway track is owned by a private company and the council pay rent to them for its use. The Marketing Director for the BR Steam Railway operation has been considering the forecast financial situation for the 3rd Quarter, July - September 2018. She has supplied you with the following: Black River Steam Railway Operational Statement - Quarter 3, 2018 Rs Rs Turnover - ticketing 1,008,000 Cost of sales: Direct labour 328,320 Variable railway service overheads 299,520 Fixed railway service overheads 155,000 782,840 Gross profit 225,160 Admin and sales overheads 18,500 Fees payable for line rental - Variable 149,760 - Fixed 45,400 213,660 Profit from operations 11,500 In addition the following information is provided: In the 2nd Quarter, 72,000 tickets were sold and the forecast turnover for Quarter 3 is based on a 20% reduction in the volume of ticket sales due to seasonal variations. The variable fee payable to the rail track company is based on ticket sales, not turnover. If the number of tickets sold is more than 70,000, the variable cost falls by Rs0.70 per ticket for the entire quarter's volume. The marketing team has put together two proposals that could improve the Quarter 3 financial position: Proposal A-marketing campaign to increase ticket sales: Additional fee paid on a one-off basis of Rs15,420. In addition to this the advertising agency would receive Rs1,50 per ticket for all of the tickets sold during the quarter. It is estimated that this advertising campaign alone would increase the volume of ticket sales by 30% above their Quarter 3 forecast levels. The price per ticket would remain the same. Proposal B - reduce ticket prices by 4%: It is estimated that this will bring the number of tickets sold back to 95% of the number sold in Quarter 2. Fixed admin and sales overheads would be reduced to Rs12,260. Requirement for question (a) Produce an evaluation of both proposals that calculates: The number of tickets to be sold. The contribution per ticket. The change in operating profit compared with the forecast. The breakeven point in both the number of tickets and sales revenue. The % margin of safety over the breakeven number of tickets sold. (11 marks) (b) Recommend which proposal, if either, should be accepted on financial grounds. (3 marks) (c) Upon further investigation of costs it has become apparent that the service overheads which the Marketing Director has classified as fixed in her forecast, may actually behave in a semi-variable manner, as she has not included all of the cost elements. You have obtained the total cost pattern for these overheads over six quarters and they are as follow: Period Ticket volume Total Cost Rs 1 68,000 176,840 2 69,500 179,990 3 71,680 184,568 4 77,000 195,740 5 80,000 202,040 6 71,000 183,140 By analysing the period costs in the table, determine the fixed and variable elements of the service overhead costs and state how this may or may not change the recommendation that you made in part (b) above
