Question Tag: Equipment Hire

TK is a theme park. The following information is available for the forthcoming month:

Forecast daily ticket sales and prices:

The theme park will be open for 30 days in the month.

Costs:

• Variable costs per person per day are forecast to be N2050.
• Fixed costs for the month are forecast to be N130,000,000.

Pricing Information:

• The sales of pre-booked discounted tickets and standard tickets will be restricted to 1,500 and 8,000 per day respectively for the forthcoming month. It is forecast that all of these tickets will be sold.
• A premium family ticket admits four people to the theme park and allows them to go to the front of the queues in the theme park. The price of a premium family ticket has been set at N3,700 to maximize profit.

Market information shows that for every N100 increase in the selling price of a premium family ticket, the demand would reduce by 25 tickets. For every N100 decrease in the selling price, the demand would increase by 25 tickets.

The theme park has adequate capacity to accommodate any level of demand for premium family tickets. It is assumed that four people would always be admitted on every premium family ticket sold. Sales of the different ticket types are independent of each other.

Equipment Hire:

TK is considering hiring some automated ticket reading equipment for the forthcoming month. The hire of this equipment would increase fixed costs by N5,000,000 for the month. However, variable costs per person would be reduced by 8% during the period of the hire.

Required:

a) Calculate the financial benefit of hiring the equipment for the forthcoming month given its impact on variable cost and the price charged for premium family tickets. (11 Marks)

b) It has now been realized that a competing theme park is planning to offer discounted ticket prices during the forthcoming months. It is thought that this will reduce the demand for TK’s standard tickets. TK will not be able to reduce the price of the standard tickets for the forthcoming month.

Discuss the sensitivity of the decision to hire the equipment to a change in the number of standard tickets sold per day. (Note: Your answer should include the calculation of the sensitivity.) (4 Marks)