Question

Matt Simpson owns and operate pson owns and operates Quality Craft Rentals, which offers canoe rentals and shutte service me 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 Snute that returns them to their vehicles at the station they entered. Following are the costs involved in providing this service each year. Variable Costs $ 8.50 Canoe maintenance Licenses and permits Vehicle leases Station lease Advertising Operating costs Fixed Costs $ 2,900 3,600 6,000 7,520 6,600 21,600 6.50 6.50 Quality Craft Rentals began business with a $29,000 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 7,200 per year. Required: Matt is happy with the steady rental average of 7,200 per year. For this number of rentals, what price should he charge per rental for the business to make an annual 14% before-tax return on assets using life-cycle costs? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Price per rental

Answer 1

1. Calculation of total cost,
   1. Total fixed cost = 2900+3600+6000+7520+6600+21600 = 48,220.
   2. Depreciation to be recovered every year = 29000/20 years = 2,900.
   3. Variable cost per rental = 8.5 + 6.5 + 6.5 = 21.5.
2. Calculation of contribution to earn 14% return on asset,
   1. Required return = 29,000*14% = 4060.
   2. Total fixed costs = 48220 + 2900 = 51,120
   3. Required contribution = 51120 + 4060 = 55,180.
   4. Required contribution per rental = 55180/7200 = 7.66.
3. Price per rental,
   1. Price per rental = variable cost + required contribution = 21.5 + 7.66 = $29.16 per rental.
4. There might be a varience between the answer and my work because of rounding off.