Question

In this paper, please discuss the following case study. In doing so, explain your approach to the problem, support your approach with references, and execute your approach. Provide an answer to the case study’s question with a recommendation.

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.

Superior papers will:

• Perform all calculations correctly.
• Articulate the approach to solving the problem.
• Explain the relationship of the costs to the concept of contribution margin.
• Discuss any limitations of the data, including what may be missing.
• Conclude on whether the bank should issue the loan.

Answer 1

Solution:

Requirement 1:

1. Break-even quantity      =    Annual Fixed Cost / Contribution per Flight

=    $40,200 / $45

=    893 Flights (Approx)

        Working:

Annual Fixed Costs          =    (Loan Payment + Scheduler Salary + Dock fees) *12

                                                =    ($350 + $2,500 + $500) * 12

                                                =    $40,200

Contribution per Flight =    Sales price per Flight – Variable Cost per Flight

                                                =    $175 – ($100 + $30)

                                                =    $45

2. Since company expects break-even during year 1, therefore, quantity sold is equals break-even quantity that means there is no profit or loss during the year. That’s why:

Contribution Margin      =   Fixed Cost

                                                =   $40,200

3. Contribution Margin Ratio =   (Contribution per Flight / Sales price per Flight)* 100

       =   ($45 / $175) *100

       =    25.71 %

Requirement 2:

1. Break-even quantity      =    Annual Fixed Cost / Contribution per Flight

=    $40,200 / $41.5

=    969 Flights (Approx)

Working:

Annual Fixed cost remains same as in case Requirement 1 (i.e. $40,200)

Contribution per Flight =    Sales price per Flight – Variable Cost per Flight

                                                =    $175 – {$100 + $30 + (175 * 2%)}

                                                =    $41.5

2. Break-even sales             =   Break-even quantity * Sales price per Flight

=   969 Flights * $175

=   $169,575

3. Contribution Margin Ratio =   (Contribution per Flight / Sales price per Flight)* 100

       =   ($41.5 / $175)* 100

      =   23.71 %

Requirement 3:

Determination of number of flights needed to retain profit of $10,000

        No. of Flights needed    =   (Fixed Cost + Profit) / Contribution per flight

                                              =   ($40,200 + $10,000) / $45

                                              =   1,116 Flights (Approx)

Answer 2

The parasailing company needs to make 1210 flights to retain a profit of $10,000 in Year 3 with the assumption that the company does allow for referrals.
No. of Flights needed = (Fixed Cost + Profit)/ Contribution margin per flight = $50,200/$41.5
The number of fights needed = 1,209.63.