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 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 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.

Answer 1

Page-1 Answers According to the given question, you are the owner of a parasailing company that is expanding Operations to a new beachfront location, and you need to prepare a 3 yos analysis for the bank. Here we have to findo o contribution margin @ Contribution margin ratio. ③ Break even quality. Ô Contribution margin formula: a sale price unit - Variable costunit = $175 - $100 = $75 $75 is the contribution margin for year-1 now contribution margin for year-2 is that sales price and variable cost will be increased by 20% so New sale poice= 1757175x2/100 =$1785 new variable cost = 100+100x2/100 = $102

Year -2 contribution will be - Sole porce lunit - variable cost/unit = $178.5 -100 = $7805 ® contribution Margin Ratio formular - Total sale unita variable cost/ unit 4100 total sale/ unit Year-i contoi bution Mavegin ratio is - 175 -100 x 100 - 175 ratio is = 42.85010 Year- a contribution margin = 178.5-102 - X100 178055 = 42.86%

Unit © Break Even Quantity formulas fixed cost / contribution margin per unit fix cost will be same for years a year 2 * fix cost= Loan payment / month $350 + + full time salary $2500 + Boat crew per flight $30 + Dock free $500 Total = $3350 fix cost *Year-) Break Even unit = contribution per unit = 3380 (75 - Calculated in poin-1) 75 45.06 units Year-2 Break Even unit= fix cost contribution perunit 3380 7615 - 44.18 units

Break Even sale's calculations: - = Break even units x sale price Yeast Break even sales = 45.06x175 -$7885.50 Year-2 Break even sales = the.18X178.5 -$7885.13