Question

Classic Limo, Inc., provides limousine service to Tri-Cities airport. The price of the service is fixed at a flat rate for each trip and most costs of providing service are stable for each trip. Marc Pence, the owner, budgets income by estimating two factors that fluctuate with the economy: the fuel cost associated with each trip and the number of customers who will take trips. Looking at next year, Marc develops the following estimates of contribution margin (price less variable cost of the trip, including fuel) and for the estimated number of customers. Although Marc understands that it is not strictly true, he assumes that the cost of fuel and the number of customers are independent. Scenario Excellent Fair Poor Contribution Margin per Ride (Price – Variable cost) $45 40 Number of Customers 5,700 3,500 2,000 15 In addition to the costs of a ride, Marc estimates that other service costs are $48,000 plus $5 for each customer (ride) in excess of 3,500 rides. Annual administrative and marketing costs are estimated to be $22,000 plus 10 percent of the contribution margin. Required: Prepare an analysis of the possible operating income for Classic Limo, Inc., similar to that in Exhibit 13.15. What is the range of possible operating incomes? Contribution Margin Number of Customers Total Contribution Margin Service Costs Marketing & Admin Operating Profit (Loss) 0 40 $ $ Poor Fair Excellent Poor Fair Excellent Poor Fair 15 2,000 2,000 45 2,000 15 3,500 403,500 453,500 155 ,700 40 5 ,700 45 5,700 Excellent $ $ $ $ 0 0

Answer 1

Answer:

	Contribution Margin	Numbers of Customers	Total Contribution Margin	Service costs	Marketing & Admin	Operating Profit / (Loss)
	A	B	C=A*B	D	E=22000+(C*10%)	F=C-D-E
Poor	15	2,000	30,000	48,000	25,000	-43,000
Fair	40	2,000	80,000	48,000	30,000	2,000
Excellent	45	2,000	90,000	48,000	31,000	11,000
Poor	15	3,500	52,500	48,000	27,250	-22,750
Fair	40	3,500	1,40,000	48,000	36,000	56,000
Excellent	45	3,500	1,57,500	48,000	37,750	71,750
Poor	15	5,700	85,500	* 59,000	30,550	-4,050
Fair	40	5,700	2,28,000	* 59,000	44,800	1,24,200
Excellent	45	5,700	2,56,500	* 59,000	47,650	1,49,850
*Service costs=48000+(5700-3500)*2