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May 22, 2021 at 10:25 am #621422xyzc
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Question: Hare Events is a company which specialises in organising sporting events in major cities across Teeland. It has approached the local council of Edglas, a large city in the nnorth of Teeland, to ask to host a running festival which will include both a full marathon and a half marathon race.
Based on the prices it charges for entry to similar events in other locations, Hare Events has decided on an entry fee of $55 for the full marathon and $30 for the half marathon. It expects that the maximum entries will be 20,000 for the full marathon and 14000 for the half marathon.
Each runner will receive a race pack on completion of the race which will include a medal, t-shirt, water and chocolate. Water stations will need to be available at every five kilometre point along the race route, stocked with sufficient supplies of water, sports drinks and gels. These costs are considered to be variable as they depend on the number of race entries.
Hare Events will also incur the following fixed costs. It will need to pay a fixed fee to the Edglas council for permits,, road closures and support from the local police and medical services. A full risk assessment needs to be undertaken for insurance purposes. A marketing campaign is planned via advertising on running websites, in fitness magazines and at other events. Hare Events is organising in Teeland, and the company which Hare Events usually employs to do the race photography has been approached.
The details of these costs are shown below:
Race packs 15.8
Water stations 2.4
Council fees 300000
Risk assessment and insurance 50000
Assuming that the race entries are sold in a constant sales mix based on the expected race entry numbers, what is the sales revenue Hare Events needs to achieve in order to break even (to the nearest $000)?
In the above question, I calculated the contribution to sales ratio to be 1.269 by dividing the contribution per unit for each marathon by the selling prices for each marathon and then adding them up. Then I divided the total fixed cost by this number to arrive at the breakeven revenue, but this was wrong, and I still don’t understand where I went wrong. Also what do the words constant sales mix mean and imply.May 22, 2021 at 1:53 pm #621438John MoffatKeymaster
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Constant sales mix means that the actual sales are in the same ratio as the expected maximum entries i.e. 20,000:14,000.
To get the average CS ratio you need to calculated the total contribution (based on the maximum entries) and divide by the total sales revenue (based on the maximum entries).
This is all explained, with examples, in my free lectures on CVP analysis. The lectures are a complete free course for Paper PM and cover everything needed to be able to pass the exam well.
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