Reference no: EM132569692
Sedaprasa Sdn Bhd is a newly formed company in the catering business founded by Kamarul and Nabila. Kamarul and Nabila have considerable experience in the food industry and saw an opportunity to establish a food/beverage business to service the tourist market during the four months from April to July. The business will be located in Melaka and permission has been obtained from Melaka City Council (MCC) to operate a food/beverage outlet near Klebang beach. At present Kamarul and Nabila are trying to decide between two possible food/beverage options. Pertinent information relating to each of the options is shown below. Initially, Kamarul and Nabila intend to operate the outlet themselves without employing any other staff.
Option 1 - Corn Dog on the Beach
The food outlet would offer korean style corn dog with a cheese.
Costings
Rather than having a range of selling prices a fixed price has been set for each corn dog and this price is midway between the highest and lowest prices expected. Additionally, an average variable ingredient cost has been computed based on possible cheese fillings. Other relevant information is as follows:
Selling price per corn dog (Budgeted sales 16,800 corn dog) RM3.20
Average variable ingredient cost per corn dog RM1.20
Other variable costs (disposable cutlery, packaging etc.) 20% selling price
Licence fee payable to MCC RM1,600
Rent of premises (including tables, chairs etc.) per month RM2,000
Insurance for four month period RM1,296
Option 2 - Coconut Shake Slurpp
This beverage outlet would offer a range of beverages using secret recipe.
Costings
Again a fixed price has been set for all coconut shake beverages and this price is midway between the highest and lowest prices expected. Additionally, an average variable ingredient cost has been computed based on ice cream, ice and other flavourings that may be used in making this coconut shake. Other relevant information is as follows:
Selling price per cup of coconut shake
(Budgeted sales 12,000 cups of coconut shake) RM3.50
Average variable ingredient cost per cup of coconut shake RM0.75
Other variable costs (disposable cups, spoons, etc.) 10% selling price
Licence fee payable to MCC RM1,600
Rent of premises (including tables, chairs etc.) per month RM2,000
Insurance for four month period RM1,296
Question a. For EACH option:
i. Compute the breakeven point in sales revenue.
ii. Compute the number of units that would have to be sold to reach Sedaprasa Sdn Bhd's target net income of RM17,500.
iii. Compute the margin of safety in units and percentages, if actual sales achieved are equal to budgeted sales.
Question b. Recommend which option Sedaprasa Sdn Bhd should choose? Justify your answer.