Question

need help with 3 and 4

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 $ 8,300 Annual straight-line depreciation on boat ($175,000 original cost - $90,000 estimated resale value/20 years) S 50 Fuel Cost (per hour) Insurance Premium (annual) $1,900 Maintenance and Repairs (annual) $3,500 $7,000 Fishing Tackle and Gear (original cost) $ 20 Tackle and Bait (per guest) Deck Hand wages (per hour) $20 Dock Fees (annual) $2,400 $ 200 Captain's License (annual) $ 25 Food and Beverages (per guest) $ 750 Professional Fees (per year) 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

3. Unavoidable costs associated with operation of Fishing Unlimited are:

• Depreciation of the boat - whether big or small
• Insurance premium
• Maintenance and Repair
• Fishing Tackle and Gear
• Dock Fees
• Captain's License
• Professional Fees
• Dock Utilities

4.

Revenue Generated by 6-hour trip
	Old Boat (6 guests)		New Boat (8 guests)
Revenue	650		700
Less:
Fuel Cost	300	$50 per hour	270	10% savings over old boat
Tackle and Bait	120	$20 per guest	160	$20 per guest
Deck Hand Wages	120	$20 per hour	360	$20 per hour, with 2 additional hands
Food & Beverage	150	$25 per guest	200	$25 per guest
Total Variable Cost	690		990
Contribution	(40)		(290)
Less: Fixed Costs
Insurance premium	1,900	annual	2,128	12% increase in cost
Maintenance and Repairs	3,500	annual		no cost for first 3 years
Fishing Tackle and Gear	7,000		8,500	1500 for additional fishing tackle and gear
Dock Fees	2,400	annual	2,520	5% increase
Captain's License	200	annual	200	annual
Depreciation	8,300	annual	11,250	annual depreciation on $225k for 20 years, straight line
Total Fixed Costs	23,300		24,598

By taking the new boat, Fishing Unlimited is losing on two counts i.e. (1) Variable cost per trip {based on the 6 hour trip calculations above} and (2) Increase in Fixed cost

The Fixed Costs above do not factor Maintenance and repairs, since it will be saved for the first 3 years - however, post the initial 3 years, the expenses would kick in.

Hence, it is suggested that Fishing Unlimited continues the operations with the current small boat due to the economic advantage it brings in.