Question

having trouble with question 1 and 2

Scenario Brad Winston is the owner and operator of Fishing Unlimited, a charter fishing business operated out of Oregon Inlet, NC. Brad has been taking groups of guests offshore to fish for tuna and marlin for over 15 years. He purchased his current fishing boat when he started the business, but now believes that a larger and better-outfitted vessel would allow him to increase the rate he charges per charter. Currently, he can carry a maximum of 6 guests while the larger boat will carry up to 8. The larger boat would also require him to take 2 deck hands on each outing, providing better service to his customers. Cost data for Brad's business is shown in the figure below. Figure 1 Fishing Unlimited Annual straight-line depreciation on boat $ 8,3001 ($175,000 original cost - $90,000 estimated resale value/20 years) Fuel Cost (per hour) $50 Insurance Premium (annual) $ 1,900 Maintenance and Repairs (annual) $ 3,500 Fishing Tackle and Gear (original cost) $ 7,000 Tackle and Bait (per guest) S 20 Deck Hand wages (per hour) $ 20 Dock Fees (annual) $ 2,400 Captain's License (annual) $ 200 Food and Beverages (per guest) $ 25 Professional Fees (per year) $ 750 Dock Utilities (annual) $ 1,200 Brad has someone interested in purchasing his existing boat for $80,000. He could use this cash as a deposit on the new boat which will cost him $225,000. His banker estimates the

Answer 1

Relevant costs are only those costs which will be affected, or which will change because of the business decision.

Out of the schedule of costs shown above, the following are relevant to Brad's decision to purchase a new, larger boat:

Fuel costs                     will reduce by 5%                               

Insurance premiums    will increase by 12%

Maintenance & Repairs will not be incurred for the first 3 years

Deck hand wages           will increase because 2 extra hands will be required

Dock fees                        will increase by 5%

The additional cost of tackle & gear will be a one-time expense, payable upfront

The realizable value today of the old boat is relevant, $80,000; not the book value, nor the anticipated resale value at the end of 20 years.

The additional payment to his bank for the loan to purchase the new boat ($1500 as estimated by his banker) is also relevant.