Serengeti Safaris Ltd (“SS”) is a South African company providing safari packages to tourists

in the Kruger National Park. Each safari package includes a stay at the Bush Lodge (2 days
and 2 nights) and a game drive bundle. A game drive bundle allows each tourist to travel to a
different game drive destination once during each day of the package. A tourist cannot travel
along the same game drive route more than once. SS operates for 360 days in a year and
provides game drives for 12 hours during each day.

The Bush Lodge is leased from the Gauteng Government. Rental is payable at the end of each
year from non interest bearing general funds. The Government refers tourists to SS due to the
good business relationship between itself and SS. The Lodge is located outside of the Kruger
National Park. Available game drive destinations include “Leopard Rock” (where big cats are
often spotted) and the “Waterhole” (where big mammals come to drink). Presented below are
the actual management accounts of SS.

Actual Management Accounts for year ended 31 December 2012

Sales of safari packages R 2 760 000
Sales of souvenirs R 300 000
Game ranger wages (R 423 200)
Petrol costs (R 96 600)
Depreciation (R 50 000)
Souvenir purchases (R 225 000)
Electricity (annual generator license) (R 107 100)
Electricity (usage charge) (R 55 200)
Rental (R 360 000)
NET PROFIT R 1 742 900

SS generates revenue through the sale of packages to tourists and through the sale of
souvenirs to walk in customers from a souvenir shop located in the Bush Lodge. The actual
price charged per package was R 6 000, a 20% increase on the budgeted price per package. It
was budgeted that 506 packages would be sold in 2012. Regarding souvenirs, walk in
customers were charged a price that reflected an actual profit mark up of 25% on selling
price. The budgeted mark up was planned at 20% on the cost of each souvenir. Budgeted
quantities of souvenirs sold were equal to actual quantities of souvenirs sold. The actual cost
per souvenir was as budgeted. There were no opening or closing stock of souvenirs in 2012.

SS employs a game ranger at a budgeted rate of R 125 per hour. A game drive to Leopard
Rock takes 3 hours per round trip and covers a round distance of 50 kilometres. A game drive
to the Waterhole takes 5 hours per round trip and covers a round distance of 70 kilometres.
Tourists that had purchased packages made full use of the game drives available. The game
ranger had spent 3 830 hours in game drives during 2012. SS owns a 7 year old game drive
vehicle that can seat 1 tourist. It had cost R500 000 and is depreciated over 10 years straight
line. Petrol consumption was planned at 12 litres per 100 kilometres at a planned cost of R 10
per litre. The vehicle consumed 14 litres per 100 kilometres in 2012 at a cost of R 12.50 per
litre.
The expected electricity overhead bill for the Bush Lodge at maximum capacity (18 000
kilowatt hours) will total R300 000. The expected electricity overhead bill for the Bush Lodge
under minimal capacity assumptions (6 480 kilowatt hours) will total R 173 280. Each tourist
was budgeted to use 6 Kwh per package. The Bush Lodge has space for 6 tourists. During
2012 each tourist actually used 4 kilowatt hours per day at a variable cost of R 15 per
kilowatt hour. Fixed electricity costs were 5% higher than budgeted.

SS makes use of cost volume profit analyses in its management accounts.

The CEO of SS hired a close friend (Mr Kudu) to find ways of improving SS’es profitability
in 2013. His market research (which had cost SS R 42 000) has shown the following demand
for game drives in 2013:

Destination Annual demand in tours Acceptable price per tour

Leopard Rock 600 R 4 000
Waterhole 400 R 6 000

Mr Kudu recommended the following proposal:

“SS would cancel the lease over Bush Lodge and move their business into Kudu Manor on 1
January 2013. I own the Manor and it accommodates 12 guests. SS would still operate for
360 days each year and for provide game drives for 12 hours each day. Fees of R90 000
would be payable to cancel the Bush Lodge lease. The annual rental for my Manor is
R500 000 payable in advance and will be removed from an interest bearing investment
deposit account owned by SS. This lease is non-cancellable for 3 years. SS would make use
of the same electricity generator that it had used in the Bush Lodge incurring the same annual
licence fee as was paid in 2012.

The Manor is located in the Kruger National Park, 50 kilometres away from Leopard Rock
(per roundtrip) and 70 kilometres away from the Waterhole (per roundtrip). The game ranger
will now spend 33% more time for a roundtrip to Leopard Rock and he will spend 60% more
time for a roundtrip to the Waterhole.

SS would no longer charge tourists a fixed rate per package but instead by each game drive.
Each tourist would stay at the Manor for one day and choose a game drive of their choice. All
benefits from souvenirs will accrue to me but I will not be liable for any losses nor will I
purchase any unsold souvenirs at year end. A new Manor supervisor will be hired at SS’es
expense. Allocated fixed overheads (excluding cancellation fees) will total R 800 per game
drive (based on the total quantity of game drives mentioned in the market research). Interest
rates on investment deposits are 10% per year.

Petrol consumption is set at 12 litres per 100 kilometres at a cost of R10 per litre. Electricity
usage per tourist is set at 3 Kwh per day at a cost of R 11 per Kwh. Game ranger time will
cost R 125 per hour.
REQUIRED:

1. Prepare the flexed budget of Serengeti Safaris Ltd for the financial year ended 31
December 2012, separating costs according to cost behaviour. (15 marks)

2. Perform a variance analysis for Serengeti Safaris Ltd in 2012. State clearly whether each
variance is adverse or favourable and whether a variance is applicable or not. (23 marks)

3. Assume that Kudu’s proposal is accepted but management of SS is unsure of the best
quantity of game drives to offer in order to maximise short term performance. Determine
the optimal mix of game drives that SS should offer under Kudu’s proposal in order to
maximise short term performance. Show all your workings. (15 marks)

4. Determine if Kudu’s proposal should be accepted or if SS should continue to operate as

it did in 2012 assuming that under Kudu’s proposal 240 drives to the Waterhole and 600
drives to Leopard Rock will be offered in 2013. (16 marks)

5. Assume that the management accountant of SS has provided you with the following:

Serengeti Safaris Ltd Bushwakz Ltd

2012 2012
Break even in packages 109 packages 150 packages
Margin of safety 76% 60%

You are required to draft a report to the Chairman of Serengeti Safaris Ltd wherein you:

a) Explain what each of the measures shown above represents and how Serengeti
Safaris Ltd has performed relative to Bushwakz Ltd. (5 marks)

b) Discuss how Serengeti Safaris Ltd has controlled their petrol expense in the 2012
financial year. Provide reasons to support your answer and provide possible
actions to help Serengeti Safaris Ltd control this cost where applicable. (5 marks)

c) Discuss the risks that are present in Mr Kudu’s proposal. (9 marks)

d) Discuss when ABC is beneficial and the steps that should be followed in order for
Serengeti Safaris Ltd to implement an ABC system and conclude if it would be
appropriate for Serengeti Safaris Ltd to make use of ABC.
(12 marks)