Question

You are the owner of a parasailing company that is expanding operations to a new beachfront location, and you need to prepare a three-year analysis for the bank that may loan you the funds to purchase your boat and parasailing equipment. Because of your well- established reputation, you already have received requests for "flights" to be scheduled as soon as you the new location. Therefore, you expect to break- open 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 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 the 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. Superior papers will: Perform all calculations correctly Articulate the approach to solving the problem. Explain the relationship of the costs to the concept of

understand

Answer 1

1) $175 Sale price Less: variable cost: Fuel per flight Boat crew per flight Contribution margin $100 $30 $130 $45 Contribution margin ratio (Contribution margin/sale price) 0.2571429 Annual fixed cost: Loan payment ($350*12months) $ Deck fees ($500*12monthes) $ Salary ($2,500*12months) $ 4,200 6,000 30,000 $ 40,200 Desired profit Nil Break-even quantity (Fixed cost+desired profit/Contribution margin) Round off ($40,200/$45) 893.33333 894

$175 $3.50 $171.50 Sale price Less: referral cost (2% of sale price) Revised sale price Less: variable cost: Fuel per flight Boat crew per flight Contribution margin $100 $30 $130 $42 Contribution margin ratio (Contribution margin/sale price) 0.2419825 Annual fixed cost: Loan payment ($350*12months $ Deck fees ($500*12monthes) $ Salary ($2,500*12months) $ 4,200 6,000 30,000 $ 40,200 Desired profit Nil Break-even quantity (Fixed cost+desired profit/Contribution margin) Round off ($40,200/$42) 968.6747 968

Desired profit $10,000 Break-even quantity (Fixed cost+desired profit/Contribution margin) Round off ($40,200+$10,000/$42) 1209.6386 1210

Conclusion: Since, company is able to maintain the break eve quantity, bank should issue loan to the company.