Sago Holidays Ltd sells special packaged holidays to Europe at £600 each, and th

Question

Sago Holidays Ltd sells special packaged holidays to Europe at £600 each, and they expect to sell 1,000 holidays this year. The variable costs per holiday amount to £400, and the fixed costs of the operation total £100,000. As the holidays are very labour intensive, the company proposes to change to a self-catering holiday next year, which would reduce the variable costs of each holiday to £190 but would have the effect of increasing the fixed costs of the operation to £336,000. A selling price reduction of 5% is planned which is expected to increase the number of holidays by 10%. A feasibility study of the changes has already been carried out at a cost of £10,000.

a ) Construct a profit & loss statement in a contribution format to show the current performance of Sago.

b) Identify the costs and revenues which are relevant to the proposed changes, and draw up a statement to indicate their financial effects. Advise Sago Ltd whether to make the change.

Explanation / Answer

a. Profit and loss statement

b. Profit and loss statement

* Feasibility study of the changes carried out at a cost of £10,000 is irrelavent as it is a sunk cost.

The proposed change is not advisable as it is reducing the profit by 18,000 (100,000 - 82,000).

Revenues (1,000 * 600) 600,000 Variable costs (1,000 * 400) 400,000 Contribution margin 200,000 Fixed costs 100,000 Income from operations 100,000

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.