Question

Dan runs a high adventure, water-rafting experience on the Snake River in Wyoming. Dan is reviewing his pricing schedule for the upcoming season [summer of 2016]. Some of his costs can be applied to each individual customer that signs-up for trips. These include food items such as water and snack items [$10.00/person], individual life vests [$16.00/person]; and, individual sunscreen, tissue, and first-aid kits [$6.00/person], and the wages of the river guide on each trip which runs $6.00 per person/trip. He also has predictable costs such as licensing fees of $500; Kayak rentals $4,000, office rental $1000/month for 4 months; accounting services $2,000, and his Internet and mobile services expenses $800.

If Dan prices his 1 hr.- adventure at $100/customer, how many persons must take the trip in order for Greg to break-even? SHOW YOUR WORK

200 persons

183 persons

134 persons

83 persons

Calculate the Variable Costs. Variable Costs = $_______________

Calculate the Fixed Costs. Fixed Costs = $________________

Calculate Break/Even in Units (in this case, the number of clients that Dan must serve in order to cover (both) variable costs and fixed costs, but not make a profit.

B/E = $_________/ _________ =

       = persons (we always round-up because we cannot serve part of a unit

How many people must Dan served during his four month summer period in order to make a $40,000 profit, above his break/even point? How would you quickly figure this?

                                = persons

Answer 1

• Calculation of variable cost

Variable Cost = Food items +  individual life vests + individual sunscreen, tissue, and first-aid kits + wages of the river guide

Variable Cost = 10 + 16 + 6 + 6

Variable Cost = $38 per person

• Calculation of Fixed cost

Fixed cost = License fees + kayal rent + office rent + accounting services + internet and mobile exp.

Fixed cost = 500 + 4000 + (1000 x 4months) + 2000 + 800

Fixed cost  = $11300 (summer period)

• Break even point

Break even point = Fixed Cost / contribution per unit

Break even point = 11300 / 0.62

Break even point = 183 persons

Note : Contribution per unit = sale price per unit - variable cost per unit

Contribution per unit = 100 - 38

Contribution per unit = $ 62

• Calculation of number of people DAN has to serve, If Dan wants to earn $40000 profit

Sale to earn $40000 profit = (fixed cost + desired profit) / CMP Ratio

Sale to earn $40000 profit = (11300 + 40000) / 62%

Sale to earn $40000 profit = 513000 / 62%

Sale to earn $40000 profit = $ 82742 (approx)

Number of customer to serve to earn $40000 profit = Total Revenue / Sale price

Number of customer to serve to earn $40000 profit = 82742 / 100

Number of customer to serve to earn $40000 profit = 828 Person (answer cannot be decimal because cannot count person as half)

Note : CMP Ratio = (sale price - variable cost) / sale price

CMP Ratio = (100 - 38) / 100

CMP Ratio = 62 / 100

CMP Ratio = 0.62