Question

Matt Simpson owns and operates Quality Craft Rentals, which offers canoe rentals and shuttle service on the Nantahala River. Customers can rent canoes at one station, enter the river there, and exit at one of two designated locations to catch a shuttle that returns them to their vehicles at the station they entered. Following are the costs involved in providing this service each year:

   Fixed Costs    Variable Costs

Canoe maintenance $ 2,300 $ 2.50

Licenses and permits 3,000    0

Vehicle leases 5,400    0

Station lease 6,920    0

Advertising    6,000 0.50

Operating costs 21,000 0.50

Quality Craft Rentals began business with a $25,000 expenditure for a fleet of 30 canoes. These are expected to last 10 more years, at which time a new fleet must be purchased. Rentals have been stable at about 6,400 per year.

Required: Matt is happy with the steady rental average of 6,400 per year. For this number of rentals, what price should he charge per rental for the business to make an annual 20% before-tax return on assets using life-cycle costs? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Answer 1

Req1

Statement of Price to be charged for 1 year
Particulars		Amount
Fixed Cost
Canoe Maintenance	$2,300
Licenses and Permits	$3,000
Vehicle Leases	$5,400
Station Lease	$6,920
Advertising	$6,000
Operating Costs	$21,000
Depreciation ($25000/10years)	$2,500	$47,120
Variable Cost for 6400 rentals
Canoe Maintenance (6400 × $2.5)	$16,000
Advertising (6400 × $0.50)	$3,200
Operating Costs (6400 × $0.50)	$3,200	$22,400
Total Cost		$69,520
Add: Return @ 20% on assets [$25000 × 20%]		$5,000
Total Expected Revenue		$74,520
Average rentals per annum		6400
Price per rental		$11.64