- 12 Marks
Question
PieceJoz FM, a media organization, is considering hosting a two-day beauty pageant in June 2018. The show will be expensive to run and promote. There will be three cash prizes on offer for the pageant, namely:
- 1st Place – GH¢5,000
- 2nd Place = GH¢2,000
- 3rd Place = GH¢1,000.
Other costs will include:
- Three judges of the show will each be paid GH¢400 per day plus a one-off travel expense allowance of GH¢150.
- Promotional costs of GH¢3,000 have been spent to date. A further GH¢1,000 per month will have to be incurred for the five months leading up to the pageant and GH¢4,000 in the month of the show.
- Utility costs incurred each day of the pageant are estimated to follow the function GH¢200 + 5X where X is the number of contestants performing. The council expects 30 contestants per day.
- Stocks of wood and steel to construct the stage. 400 metres of wood already in stock will be used. This originally cost GH¢20 per metre but will not be replaced. It was due to be sold to an employee at a price of GH¢8 per metre. 60 metres of steel that originally cost GH¢18 per metre is to be used. Steel has a scrap value of GH¢10 per metre. This steel will have to be replaced. The market price of steel has increased to GH¢15 per metre.
- 140 labour hours to build the stage. Currently, PieceJoz FM maintenance employees are paid GH¢600 each, plus 20% employers’ costs for a 40-hour week. Two such employees will be idle for the week required to build the stage. The remaining labour will be hired in at a casual rate of GH¢10 per hour.
PieceJoz FM expects that:
- 1,000 people will attend the beauty pageant on the first day and 2,000 on the final day.
- Daily tickets will sell at GH¢12 per adult ticket and GH¢5 per child ticket. It is expected that ticket sales will be 40% children and 60% adult.
- An event organizer called Magic Media has submitted a proposal to organize this program on behalf of PieceJoz FM at a fee of GH¢13,100 including utility cost of GH¢900.
Required:
a) Using the information above, advise, from a financial perspective, whether management of PieceJoz FM should organize the beauty pageant or outsource it to Magic Media.
Answer
Using Incremental Approach:
Expense | GH¢ |
---|---|
Promotion costs (GH¢1,000 x 5 months) | 5,000 |
Month of show (Promotion) | 4,000 |
Utility costs (2(200+30(5)) | 700 |
Wood (400 @GH¢8) | 3,200 |
Steel 60 @ GH¢15 | 900 |
Labour (140-80)GH¢10 | 600 |
Total | 14,400 |
Less Outsource | (13,100) |
Net Gain | 1,300 |
Using the Total Approach:
In House | Outsource |
---|---|
GH¢ | GH¢ |
Award Prizes (GH¢5000+GH¢2000+GH¢1000) | 8,000 |
Judges (3(GH¢400(2 days)+ 3(150) | 2,850 |
Promotion (GH¢1000x 5months) + GH¢4000 | 9,000 |
Utility costs (2(200+30(5)) | 700 |
Wood (400 @ GH¢8) | 3,200 |
Steel 60 @ GH¢15 | 900 |
Labour(140-80)GH¢10 | 600 |
Hiring fees | – |
Idle labour cost (6002 + 2(0.2600)) | 1,440 |
Total | 26,690 |
Decision:
Net Gain: GH¢1,300 when outsourced. It will therefore be prudent from a financial perspective to outsource.
- Tags: Financial Decision, Incremental Costs, Outsourcing, Relevant Costs
- Level: Level 2
- Topic: Relevant Cost and Revenue
- Series: MAY 2019
- Uploader: Joseph