Question

Dear Experts,

The following question has about 5 answers here which have 2 different forms: one form treats the BOAT CREW PER FLIGHT ($30) as a Variable Cost while the other treats it as a Fixed Cost. Which of the TWO types of answers MUST be correct in this case?

QUESTION: You are the owner of a parasailing company that is expanding operations to a new beachfront location, and you need to prepare a 3-year analysis for the bank that may loan you the funds to purchase your boat and parasailing equipment. A lot of business is done on a referral basis, where a company pays a fee to a 3rd party to send them customers. However, because of your well-established reputation, you already have received requests for “flights” to be scheduled as soon as you open the new location. Therefore, you expect to break-even the first year but must calculate the number of flights needed. You also need to determine the new break-even point in Year 2 if the location allows referrals, which you believe will cost on average about 2% of the sales price overall. Finally, you need to determine the volume needed to have $10,000 in profit in Year 3. The following information is available:

• Sales price per flight $175
• Estimated loan payment per month $350
• Fuel costs per flight $100
• Full-time scheduler salary $2,500 per month
• Boat crew per flight $30
• $500 per month dock fee and use of a small office on a pier

Requirements:

• Calculate the Year 1 break-even quantity, contribution margin, and contribution margin ratio. Explain how the values were determined.
• Calculate the Year 2 break-even quantity, break-even sales, and contribution margin ratio. Explain how the values were determined.
• Determine the number of flights (units) needed to retain a profit of $10,000 in Year 3, assuming the company does allow for referrals.
• Recommend if the bank should issue the loan.

Answer 1

year 1 year 2 with referral in S) year 3 without Referral cost (in 5) Jyear 3 with referral cost Particulars Cost Sales price 175 175 175 1001 100 100 30 100 30 30 Variable Cost Fuel costs Crew cost Referrals cost 2% Total V.Cost Contribution Contribution Ratio 30 3.5 3.5 133.5 130 130 45 26% 133.5 41.5 24% 24% 26% 350 2500 Fixed Cost Loan EMI salaries Dock fee Total F.Cost Estimated Profit Total Margin required Break-even quantity Fligts valume required to get margin 350 2500 500 3350 350 2500 500 3350 500 3350 350 2500 500 3350 10000 13350 80.72 321.69 10000 74.44 80.72 13350 74.44 296.67 Explaination 1. Fuel cost, Crew cost and referral costs considered as Variable cost since linked directly with sales. 2. Loan EMI and Salaries and Dock fee cosidered as faced cost 3. while 3rd year estimated profit calculatied for both the ways with referral and without referral business.