Financial Reporting

Question

LCF is a football club based in Kot Dor. The only source of revenue of the club is gate money collected

from matches played on the AXA football stadium, the home ground of LCF. AXA football stadium has a

capacity of 25,000 seats and normal price of one ticket is $18. During one football season the club p1ays

30 matches. On average 60 percent of the tickets are sold over the season. The fixed cost of the club for

one season is $1,200,000 while the variable cost associated with one normal ticket is $2.

LCF is considering two independent projects

Project I- Buy superstar Darwin

LCF is considering buying superstar Brazilian footballer, Darwin, available on a free transfer next season.

It is expected that the player will attract a bigger crowd and the average attendance will rise to 70

percent. The club will have to pay Darwin premium wages to attract him to LCF. In addition, a marketing

campaign will be carried out to mark the arrival of Darwin. As such fixed cost of the club for the next

season will rise to $1,800,000. The club will be able to increase the normal price of a ticket to $20 while

the variable cost per ticket will stay unchanged.

Project II- Introduce Season Ticket

The season ticket will allow the holder to attend all matches of LCF at AXA football stadium at a

discount. A season ticket will cost $500 and the variable cost associated with a season ticket is $50. It is

expected that 2 normal tickets will be sold for every season ticket.

Required

(a) Using the current annual budgeted figures, and ignoring the two proposed projects, (i)

calculate the number of tickets to be sold to breakeven over a season (ii) number of

matches LCF must play in a season to breakeven (iii) the profit made over the season.

(b) Assuming LCF goes ahead with project I in the next season, (i) calculate the number of

tickets to be sold to break-even and advise LCF on the acceptability of project I. (ii) Suggest 3

non-financial factors LCF must consider before accepting project I.

(c) Assuming LCF goes ahead with project II in the next season, calculate the break-even sales

revenue.

Answer 1

a)

Assume X is number of normal tickets needs to be sold to breakeven.

Sale= fixed cost + Variable cost

18*X=1,200,000+2*X

16*X=1,200,000

X=75,000

75,000 tickets need to be sold to breakeven.

Average number of tickets sold per game:

25,000*60%=15,000

75,000/15,000=5

5 games must be played to breakeven.

Profit=Sale- Fixed cost-Variable

15,000*18*30-1,200,000-15,000*2*30=8,100,000-1,200,000-900,000=$6,000,000

b)

20X=1,800,000+2X

X=100,000

They have to sell more tickets to breakeven if Project I is taken. So, it is not recommended.

c)

 Assume the number of season tickets needs to be sold is Y.

500*Y +18*2Y=1,200,000+50Y+2*2Y

482Y=1,200,000

Y=2490

Revenue required to breakeven if project II is taken:

500*2490+18*2*2490=1,334,640