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.
Superior papers will:

Perform all calculations correctly.
Articulate the approach to solving the problem.
Explain the relationship of the costs to the concept of contribution margin.
Discuss any limitations of the data, including what may be missing.
Conclude on whether the bank should issue the loan

Answer 1

Answer Page No o Contribution nergia Year I Contribution margin = sales price perunt – veviable corch per unit = $146 – $100 = $75 (: variable cosf = fuel conf Чол ә neus sales price = 145+ (175x2 %) new variable cosf = 100+ (100x27) = $102 : Contribution margin = 148.5 - 102 = $76.5 Contribution margin Year I Contribution margin vratio =- Sale lumit – variable cool per unit sales per unit 195-100 175 x 100

Page No ③ = 42,86% Year 2 Contribution margin ratio News sales price - variable cont nee = - New sales poice peronit 18.5102 - X 100 178.5 42.864. Bencatat every corto Yeart fixed cost a loan payment per month + full time salary :. + boat crews per flight + dock fee 350 + 2500 + 30 +500 = $3380 fixed cost Break even onilo in - Contribution margin per unit = 3380 15 i 45.07 units

Page No ③ Year 2 fixed cost $3380 Break even - unito fixed cost Yean a contribution per unit 3380 $76.5 44.18 units Becake ever sales Yean! Breala even sales Year! = 3 Break even units x sales price 4507 x 175 7887.25 ܐܗc Break even sales a 44.18 X 148.55 = $4886.13 Year ! Year a Contribution margin $45 $76.5 Contribution margin ratio Break even units Break even sales . 42.86% 45.07 units 44.18 units $7887.25 $7886:13