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Cost behaviour and Break even analysis.
How does a public sector organisation which produces different types of (related) products (such as different types of trips with different priced tickets), set prices in order to break even and cover its fixed and operating costs?
• Convert everything on the revenue and cost sides to single ticket equivalents.
• Constraints: a single visit ticket cannot be lower than R20 which will be the lowest price and attract the greatest number of commuters.
• As prices increase, the quantities of tickets sold will decrease (relative to the maximum ticket sales) but the variable costs will decrease.
• As prices increase, and commuter numbers decline, fewer ferries will need to be commissioned.
Individual assignment 1: Liberty Island and Museum (2)
• LIAM exercise: For Question 6 use USP = FC/Q + UVC§ USP = You must determine USP for breakeven, but USP minimum R20 per single ticket § Q of physical tickets = 2 million single visit tickets + 4 million family tickets + 2 million small group tickets (note the value of physical tickets is different depending on their price) § If the price is R20 for single, then it will be R40 for family and R60 for small group tickets § Now, recalculate total Q of the three types of physical tickets as a single ticket equivalent § Total FC = overheads + buses = R50 000 000 + (R3 852 110 x 50 buses) § UVC = Variable costs R10 per ticket; note that UVC is per REAL physical ticket, not the total single ticket equivalents (dispensing each ticket at vending machines costs the same,irrespective of the value/price of the ticket) § UVC = Calculate total VC and recalculate UVC for total single ticket equivalents § If USP exceeds R20.00, recalculate with reduced Q and FC as indicated until you are within breakeven parameters
• For Question 7, use Q of your answer to Question 6 and recalculate as given sales mix
• Question 8 use OI = (USP x Q) – (UVC x Q) – FC and keep on increasing USP and with it reducing Q and FC as indicated, until OI no longer increases
How does a public sector organisation which produces different types of (related) products (such as different types of trips with different priced tickets), set prices in order to break even and cover its fixed and operating costs?Explain
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