Question

Safari Escapes generates average revenue of $4,000 per person on its 5-day package tours to wildlife parks in Kenya. The variable costs per person are as follows: (Click on the icon to view the variable costs per person.) Annual fixed costs total $480,000. Read the requirements. Requirement 1. Calculate the number of package tours that must be sold to break even. Determine the formula used to calculate the breakeven number of un Requirements Requirement 2. Calculate the revenue needed to earn a target opera 1. 2. 3. Determine the formula used to calculate the revenue to achieve the ta ven. (Enter ratios, if any, to two decimal places, X.XX.) Calculate the number of package tours that must be sold to break even. Calculate the revenue needed to earn a target operating income of $100,000. If fixed costs increase by $24,000, what decrease in variable cost per person must be achieved to maintain the breakeven point calculated in requirement 1? The general manager at Safari Escapes proposes to increase the price of the package tour to $4,400 to decrease the breakeven point in units. Using information in the original problem, calculate the new breakeven point in units. What factor manager consider before deciding to increase the price of the package tour? Requirement 3. If fixed costs increase by $24,000, what decrease in Determine the formula to calculate the reduction in variable costs to s Print Done cost per unit Requirement 4. The general manager at Safari Escapes proposes to increase the price of the package tour to $4,400 to decrease the breakeven point in units. Using information in the original problem, calculate the new breakeven point in units. What factors should the general manager consider before deciding to increase the price of the package tour?

Answer 1

1) Annual fixed costs $480,000 Contribution margin per person $400 Breakeven sales in persons 1,200 I = Workings: Selling price per person Less: Variable expense per person Contribution margin per person $4,000 $3,600 $400 2) (Annual fixed costs ($480,000 + + I Target profit $100,000) Contribution margin ratio 0.10 = = Revenue required $5,800,000 Workings: Contribution margin per person Selling price per person Contribution margin per person $400 $4,000 0.10 ($400 / $4000]

3) Revised variable cost per person $3,580 Current variable cost per person $3,600 = = Decrease in Variable cost per person $20 Workings: Target contribution margin per person = Annual fixed costs / Break-even sales persons Annual fixed costs Breakeven sales in persons Target contribution margin per person Selling price per person Revised variable cost per person $504,000 [$480000 + $24000] 1,200 [As calculated in Part-1] $420 ($504000 / 1200 persons] $4,000 $3,580 ($4000 - $420]

4) Annual fixed costs $480,000 Contribution margin per person $800 = = Breakeven sales in persons 600 I Workings: Revised selling price per person Less: Variable expense per person Contribution margin per person $4,400 $3,600 $800 Factors to consider before increasing selling price may include: * Customers' price sensitivity; * Product's market conditions and marketability * Trade-off effect between increase in selling price and decrease in profit.