Question

Classic Limo, Inc., provides limousine service to Tri-Cities airport. The price of the service is fixed at a flat rate for each trip and most costs of providing service are stable for each trip. Marc Pence, the owner, budgets income by estimating two factors that fluctuate with the economy: the fuel cost associated with each trip and the number of customers who will take trips. Looking at next year, Marc develops the following estimates of contribution margin (price less variable cost of the trip, including fuel) and for the estimated number of customers. Although Marc understands that it is not strictly true, he assumes that the cost of fuel and the number of customers are independent. Contribution Margin per Ride (Price – Variable Scenario cost) Excellent $ 45 Fair 40 Poor Number of Customers 5,400 3,200 2,400 15 In addition to the costs of a ride, Marc estimates that other service costs are $54,000 plus $4 for each customer (ride) in excess of 3,200 rides. Annual administrative and marketing costs are estimated to be $15,000 plus 10 percent of the contribution margin.

Answer 1

Analysis of possible operating income of Classic Limo, Inc

Magketing opezotiug and Admin lost (outnbution Nembex Total Coutribution (ost Searice Profit of Customes Nargin Maagin 36000 54,000 18600 3660 96000 5400o 24,600 400 108000 5400D 25,800 28200 Poos 15 Fairs 2,400 Excellent H5 54000 19,800 25800) Poos 48000 3200 15 Fairs 128000 54,000 4,800 6220D 3వ0ం 4O Excelleut 1,44,000 54000 29h00 60600 3200 81,000 62800 23,1004900 ఇ/6,0o0 62ం0 36,600 1,/6,50ం 243000 62800 39,300 A0900 5,400 Fais 5,400 Excelleut 45 5400

Operating profit/(Loss)= Total contribution margin- service cost- Marketing and administrative costs

Possible operating income:

For 2400 rides = (-36600)+17400+28200 =$ 9000

For 3200 rides = (-25800)+62200+60600=$ 97000

For 5400 rides = (-4900)+116600+140900=$ 252600

Calculations:

1. Service Cost

$54,000 is fixed for upto 3200 rides.

For 5400 rides= (5400-3200)*4 + 54000 = 62800

2. Marketing and administrative costs

= 15000+ 10% of contribution margin

For 2400 rides

- Poor = 15000+ (36000*10%)= 18600

- Fair = 15000+ (96000*10%)= 24600

- Excellent = 15000+ (108000*10%)= 25800

For 3200 rides

- Poor = 15000+(48000*10%)= 19800

- Fair= 15000+(128000*10%)= 27800

- Excellent= 15000+(144000*10%)= 29400

For 5400 rides

- Poor= 15000+(81000*10%)= 23100

- Fair= 15000+(216000*10%)= 36600

- Excellent = 15000+(243000*10%)= 39300